May 9, 2025 • 35 mins
Katie and Matt discuss Warren Buffett's retirement, his successor at Berkshire Hathaway, his other successor (Bill Ackman), OpenAI's restructuring, Sam Altman's incentives and Medicaid provider taxes.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. I've been up since
like three point thirty this morning because I saw a
raccoon and barked at him, and then we have to
go outside and chase the raccoon.
Speaker 2 (00:16):
And that took.
Speaker 1 (00:18):
That just woked me up, and then I just didn't
get back to sleep. I get it pretty early anyway.
Speaker 2 (00:22):
That's brutal.
Speaker 1 (00:22):
My kid's got to boss them. Mostly, I have always
been pretty good sleepers. The dogs turn today.
Speaker 2 (00:30):
I feel like we should note that we're in two
separate places right now.
Speaker 1 (00:33):
We're in two separate places. I'm in the Bloomberg podcast studio,
which is really cool.
Speaker 2 (00:38):
I'm at home, so I actually feel somewhat prepared for this, which.
Speaker 1 (00:42):
Is oh wow. I don't. It's gonna be great. It's
gonna be all you.
Speaker 2 (00:45):
I don't feel that prepared. But let's let's dive in. Hello,
something huge, Oh wait, we have to we have.
Speaker 1 (00:52):
To do you don't have to go ab something huge.
Speaker 2 (00:54):
Happened, something huge, the introduction. People know who we are,
we speak for ourselves.
Speaker 1 (01:01):
Hello's Somebody's the thodcast, the stuff with the money. I'm mad,
let's kitty, let's go all.
Speaker 2 (01:06):
Right, let's go Warren Buffett.
Speaker 1 (01:11):
Wow, I tell you it happened over the weekend. Berkshire Hathaway.
Cheryloy reading Warren Buffer was like, by the way, I'm
out at the end of the year, and you know,
as happens on the weekend. I'm like, I got to
write about this. On Monday, my WORFA was like, this
really news. It's a ninety four year old man retiring.
Speaker 2 (01:30):
It's like, yeah, it is kind of funny and charming.
How shocking it was, I mean not shocking, but still
the only theme. Everyone was surprised, even though we also
knew who his successor was going to be. Yeah, because
it's been teased since like twenty twenty one.
Speaker 1 (01:47):
Not to be morbid, but like, if you are well regarded,
successful person who is working successfully at age ninety four,
people have a reason not to expect you to retire.
That's like I'm going to be carried out, you know.
So it's interesting that is your time.
Speaker 2 (02:03):
But at the same time, I feel like one of
your legacies will be how well you pick your successor.
Speaker 1 (02:09):
That's true, but you're right, I mean, we knew who
the successor was, but yeah, it's like having a sort
of orderly transition is useful.
Speaker 2 (02:15):
I kind of want to talk about Craig Abel. I
mean not to be disrespectful to Warren Buffett, but he's
interesting in that he doesn't have much of an investing background.
Like you think about do you think about Charlie Munger,
you think about Warren Buffett, you think about fantastic investors,
And he doesn't necessarily have that resume. He's more of
an operator, like a business operator.
Speaker 1 (02:36):
It's so unique to have a big company that is
sort of best known as a vehicle for a guy's
stock picks, and like the guy who made the stock picks,
it's really good at making stock picks, right, And so
it's like there's a lot of value created in that company.
But also you know, they bought a lot of companies
that they operate and manage, and it would be surprising
(03:01):
if they took that giant company and transitioned it to
like the second greatest stockpicker ever, right, Like it sort
of makes sense to be like, well, like railroads and transcommusation,
we should make the CEO a guy who knows how
to run railroads and hopefully the stock picking will take
care of itself. But like it would be weird if
they picked a guy with a stockpicking back gund because
you'd have to run a company.
Speaker 2 (03:21):
Yeah, that's what he's going to do. I mean, I
read something I forget who it was from which publication,
but you know, you think about Berkshire Hathaway. It has
lessened its reliance on like the insurance side of things.
It's a lot of the energy business now, and that's
obviously where greg Abel, that's his sandbox. At the same time, though,
it is fun to think about what Berkshire Hathaway under
(03:45):
greg Abel could look like. There's a lot of speculation
that maybe we could see some spin offs. It's this huge,
sprawling conglomerate with like four hundred thousand employees. Do you
start to break things apart a little bit? So far,
greg Able seems to be saying that obviously they're going
to continue on the track they're on. But it's fun
to imagine.
Speaker 1 (04:04):
It's pretty early days for him since.
Speaker 2 (04:06):
He's not in charge, you know, but he's had a
long time to think about it. And it's true it
doesn't take over until January first of twenty twenty six,
but I don't know. I imagine in his idle day dreams,
he thinks about what he's going to do.
Speaker 1 (04:20):
It is in so many ways a weird company, including
just being a sprawling conglomerate is not really you know,
hasn't been in vogue for forty years now. And there
are a lot of things that Berkshire gets away with
or like is beloved for because of Warren Buffett's presence.
But without Warren Buffett's presence, you know, at some point
someone's gonna be like, wow, we could use capital more efficiently.
We could you know, have a cleaner story to tell
(04:42):
toone because the story you tells the investors now was like, ah,
look it's Warren Buffett, right, but like you can't tell
that story anymore, and then you have to tell a
story like you know, ooh or an energy company or whatever. Right,
you go from having this very straightforward, very widely appealing
story about Berkshire Hathlo to being like, well, we do
mobile homes and you know we have candy candy, Yeah,
(05:03):
we want a big chunk of apple for some reason.
You know, it's like when it's like all of this
disparate stuff is stuff that Warren Buffett likes. Everyone, Oh,
Warren Buffett likes it, but it's like all this disparate
stuff that Warren Buffett liked a long time ago, then
it's like a less compelling story.
Speaker 2 (05:19):
Also a question maybe they'll have to confront is you know,
we don't pay a dividend, which is fine because you
had Warren Buffett there, But now maybe they'll start paying
a dividend. I don't know.
Speaker 1 (05:29):
Yeah, it's the thing I think about a lot, right,
Like I write often a headline, a section header. People
are worried about stock buybacks, right Like, there's this idea
that like, either a company allocate's capital, right like, it
has money and it uses that to invest in building
factories or buying other companies or doing whatever it does
with the capital, or it returns the capitol to shareolders
(05:51):
and says you would do a better job of investing
this capital than we would. Right Nobody is agitating for
Berkshire to return capital. The shit sareholders because if you're
an investor in Berkshire, you're not buying a piece. You're like, oh,
I'm making you like a very focused bet on like
energy or whatever. Right You're not like I just want
like their energy exposure. You're buying because you want Warren
Buffet exposure. And you're buying it because you're certain that
(06:14):
Warren Buffett is a better alligator of capital than you are. Right,
you're buying it because you want Warren Buffett, you know
who has the giant cash pile. You're willing to wait
around until he finds what he wants to do with
that cash pile because you're certain that he's going to
do a better job invest in that cash pile than
you are. But like most companies, there's some shareholder agitation
to say, look, you CEO of a company, if you
(06:39):
hang on to a lot of cash, you'll probably to
play it in some wasteful way. You'll probably like do
some vanity project or like invest in some dumb idea.
You should returned the cash to shareholders, and the shareolders
will do a better job of figuring out what to
do with the cash then you will. Yeah, and once
Warren Buffet Lelys called those normal pressures kind of come
into play.
Speaker 2 (06:55):
For those keeping track at home, the cash pile is
currently a like three hundred and fifty billion dollars, so
it's quite a bit.
Speaker 1 (07:01):
That's a big dividend.
Speaker 2 (07:02):
I'm interested to see what happens to the shares in general.
We talk about the so and so premium on the
show frequently. Usually it's the Elon Musk premium. In this
case it's the Warren Buffett premium, which ties into the
discussion over the dividend nicely.
Speaker 1 (07:18):
Yeah, I don't have a great empirical sense of how
big the Warren Buffet premium is. I've heard people argue
that it has historically been large and it's smaller now
because even like three months ago, like you were discounting
your relatively short period of the Warren Buffett premium, right,
You're like, well, Warren Buffett will be investing this money
for some period of time, but not perpetuity. But yeah,
(07:39):
it's interesting to see what the Buffet premium will sort
of watch out to be.
Speaker 2 (07:43):
So we're talking about greg Abel, the successor to Moren
Buffett in Berkshire Hathaway, but perhaps a less formula has
also emerged this week. Can I guess, please.
Speaker 1 (07:58):
Guess?
Speaker 2 (07:58):
Friend of the show, black Man Bill Ackman. He's executive
chairman of Howard Hughes. He finally did.
Speaker 1 (08:04):
He's striking while the iron is hot, Like these are
like simultaneous actions, right, like he like strike his deal
with Howard Hughes to take like almost control forty.
Speaker 2 (08:14):
Seven of Howard Hughes holdings. So he is weighing plans
to build and insure expand the real estate company's remit
and as he stated plenty of times before, he's trying
to basically model himself after Berkshire, Hathaway become a modern
day Berkshire. And the timing was interesting. Buffett announced this
(08:37):
over the weekend and then this news for Bill Ackman
broke on Monday. So maybe they just guess at the
time their real rush.
Speaker 1 (08:44):
To get get it done, Like it's like twenty four
hours to start the new.
Speaker 2 (08:49):
Four hour turnarounds.
Speaker 1 (08:50):
Yeah, it is like Berkshire in the sense that it
is not an insurance company that he is acquiring control
of in order to eventually at an insurance company like Berksure.
Hathway started as a textile company and then like you know,
a wired insurance and insurance turned out to be a
big part of Buffet's success, right because you have like
(09:11):
the sort of like cheap non callable leverage that allows
you to make a lot of interesting bets. The Lackman
would also like to do that but acquiring and ensure
it would be too easy, so he acquired a real
estate company to build his Berkshire out of. I don't know, Yeah,
it is interesting to me as a guy who like
reads and writes about like hedge funds and high ricercy
(09:32):
trading prims and stuff. How are the eard Warren Buffett
is for doing this like really old school thing, which
is like fundamental analysis, long term buy and hold long
investing in stocks.
Speaker 2 (09:44):
Right.
Speaker 1 (09:44):
I mean he also, you know, as we're talking about,
like he also runs a conglomerate, right, and there's a
lot of operating businesses there. But like he's famous for
being like ooh, I like coke. I'll buy coke and
coke COO's op. Right, and he holds it for decades.
And when you look around it like people who are
financial celebrities these days forty years ago, like Warren Buffett
was the best of a group of people who are
competitors in that business. Right, Like you know you would
(10:07):
comp him to like celebrity mutual fund managers. Right, but
you look at it like financial celebrities these days, there's
not a lot of that, you know, It's mostly like
people who run hedge funds and are not giving you
long exposure to large cap equities, but that they are
doing some more complicated, more market neutral, more like alpha
generating thing. Stockpickers not stock pickers, and certainly not like
(10:27):
very long term stockpickers. And the guy who has really
positioned himself as being that is Bill Ackman, right, Like
you look at his fund and it's you know whatever,
it's like twelve or fourteen names that don't turn over
that often, right, And I'll tell you know, they do
derivative stuff on the side to the kind of like
smooth returns, but like the main business is like long
term fundamental stock picking. So it is interesting that he
(10:50):
wants to get into the Warren Buffett game and he's
like the only person who's doing the thing that Warren
Buffett was doing, which I think is you know, kind
of passe in many respects, but you know, it still
has an obvious appeal.
Speaker 2 (11:14):
If you thought the Berkshire Hathaway was an unusual company
not a normal company, boy, do I have a corporate
structure for you? Open ai.
Speaker 1 (11:24):
See I think that open aa is a normal tech company,
Like I think open a is totally normal. Open Ai
is a private tech company that is backed by venture capitalists.
And also Microsoftware is a big stake and like Softing, Right,
so the classic capital structure except for Microsoft like venture
capitalist and has like a giant slug up money from Softing,
and it is run by a charismatic visionary CEO, Sam Altman,
(11:48):
And the explicit proposition of the company to like investors is, look,
we're not going to like be focused on maximizing profits
for you in the short term. We're not going to
be run as a business. We have a vision about
what is good for humanity, and we're going to pursue
that long term vision. And when I say we, I
mean Sam Altman has a vision for what is good
(12:09):
for humanity and he's going to pursue that long term
vision and shareholders will not have much ability or desire
to meddle with that in the pursuit of short term profits.
And that's like very explicitly the proposition that like Facebook
put in its ip of perspectives, and that has become
like standard in Silicon Valley, right, It's like what you
want as a venture capitalist is a visionary CEO with
(12:31):
a like mission that is not the short term pursuit
of profit but has some grand vision of like humanity's
future and you want to invest in that and kind
of like take your hand off the wheel and let
the visionary CEO cook. And that's what's happening here. But
it's like it's like a nonprofit. There's like all this stuff,
but like that's what's happening, right. Like the news is
(12:53):
that like open Aye is a nonprofit that controls a
for profit basically, and they were going to convert to
being a regular for profit and now they're not, and
instead they're gonna be you know, there's gonna be like
a for profit company and it's gonna be pretty normal,
and it's gonna have shareholders and one of the big
shareholders will be the open AI nonprofit. But the nonprofit
(13:14):
will control it, right, it will have I've said it'll
have super voting shares something that like rhymes with that, right,
Like maybe it'll have super voting shares. Maybe it'll have
a contractual right to appoint the board, but it'll appoint
the board of the for profit. And you know who
will run the nonprofit, Well, there's a nonprofit board and
like the board will sort of perpetuate itself, right, Like
the current board will pick future board members, and like
(13:36):
the board is like I don't want to say handpicked
by Sam Altman, but like there was a nonprofit board
that fired Sam Altman and then he came back, and
as a condition of him coming back, he fired that
board and replaced it with his board. So you know,
who's gonna disagree with his vision of what's best for humanity?
Like SoftBank probably not so. I just think it's like
(13:56):
a very normal tech company with like a lot of
weird like thing. Yeah, it's a story that like you've
heard before about Facebook.
Speaker 2 (14:03):
You know, I find it a little bit exhausting, Like
the lip service. Maybe it's not lip service, but that
these visionary founders pay to like bettering humanity makes a
little bit more sense when you're talking about the mission
of open Ai. The mission of Facebook is pretty rich.
I mean when you phrase it that way, it just
sounds like another form.
Speaker 1 (14:20):
I believe it in some form, you know, it's.
Speaker 2 (14:24):
It kind of it rhymes with it.
Speaker 1 (14:26):
It's like very grandiose, right, Yeah, it's in many ways
like one person's idiosyncratic vision of benefiting humanity. Right, there's
a broad category of ways that AI can go where
Sam Altman will be like that was great for humanity,
and everyone else will be like, no, it wasn't right,
Like that's like a distinctly possible outcome.
Speaker 2 (14:42):
Yeah, so how it stands right now? So Sam Altman
wanted to completely separate from the nonprofit board his nonprofit
over verseers. That's not happening. They're now a PBC, which
it seems like wasn't a common structure until you started
seeing these AI labs.
Speaker 1 (15:00):
Yeah, there were a bunch of them. Like it's been
a thing for like more than a decade.
Speaker 2 (15:04):
Nap.
Speaker 1 (15:04):
Yeah, the non open AI AI labs got really into
being public benefit corporations. The idea of a PBC is
that you can run the company. The board can run
a company with like the explicit ability to consider things
other than shareholders right to consider the good of humanity,
which I kind of think companies can do. Anyway, I
don't know how material it is to be a PBC,
I mean, reading between the lines, just the teeny bit.
(15:25):
They wanted to be a for profit company where the
nonprofit board owned a minority of the shares and a
majority of the directors were elected by normal shareholders, and
what they have now gotten is that, except that the
nonprofit board controls the for profit board controls the you know,
as a majority of voting stake in the for profit company,
(15:49):
and so it gets to a point the board of
the for profit company. But it's a pretty minor difference,
I think, well, sorry, it's not a minor difference. It's
a minor structural difference. It's a major difference whether the
company is sort of alter controlled by a board answerable
to shaholders, or ultimately controlled by a board you know,
answerable to the good of humanity as somewhat filtered through
(16:10):
Sam Maltman's visions.
Speaker 2 (16:12):
I don't know. Again, it kind of reminds me of
ESG because you think about oil companies getting dinged for
not prioritizing shareholders and starting to like care about the environment.
Maybe if they were PBCs, they would be insulated from
those critiques.
Speaker 1 (16:26):
Yeah. I think it'd be hard to convert a whole
company to a PBC, but it would be interesting to try.
Speaker 2 (16:30):
Yeah, it would be fun. If I were starting a
company right now, I would probably structure myself as a PBC.
It seems like it just gives you a layer of protection.
Speaker 1 (16:39):
Yes, yes, exactly like a PBC. This is what I'm
saying about. Like the vision if you're any like a
PBC at the margin, makes you less answerable to shareholders
and gives you more ability to be like, no, we're
considering other stakeholders or other interests, right, and like that's
always additive to the flexibility of a CEO and a board.
Speaker 2 (16:56):
Right.
Speaker 1 (16:56):
It always gives you an ability to say no to
something you don't want to do because you're like, oh,
we can a difference stakeholder, right, Like it's insulation from pressure, right.
And it is phrased or interpreted as like, this company
has more obligations because it has obligations to humanity as
well as sharelders, But in fact, it means it has
fewer obligations because it means it doesn't have like a
binding obligation to shaolders in the same way that a
(17:18):
regular company does. And like the obligations to humanity are
not particularly binding, and so you just get to make
more decisions based on what you want to do rather
than what the s shelders want. This is my cynical take.
Speaker 2 (17:29):
I like this, so, I mean, I don't know, it's
just it's a it's humanity is a broad church, and
what's good for it is open to interpretation.
Speaker 1 (17:38):
I do. I'm gonna say two other things about this.
So one, I'm saying that open AI is now in
a position where it can do what it thinks is
best for humanity based on Sam Waltman's vision or what
is best for humanity. That's not quite true. So first
of all, there is a board, and the board you know,
has to exercise its own independent judgment, and like you know,
it's not totally under the control of Sam Waldman, who
(17:58):
is not a sheldering, because only whatever moral power he
brings to it, and like one board seat, moral power
is quite big because when he got fired, all the
board got fired too. But anyway, but the other person
who has a lot of say over open AI's vision
for humanity is the Attorney General of the state of California,
also other attorneys like Delaware, but like largely California. Because
open a is controlled by a nonprofit, the nonprofit is
(18:21):
subject to like state attorney general jurisdiction, and the attorney generals,
particularly of California, had a lot of input into this
this for profit conversion. And I think still do like
get to sign off on like the current structure, and
they presumably have some power going forward. If, like open AI,
(18:43):
the nonprofit says we are going to appoint Skydeat to
the board of the public company so it can slay humanity,
the California Attorney General can be like, no, that's not
in the best interests of humanities who don't do it right.
There's some oversight of nonprofits that exists here that wouldn't
exist if it was just a regular public company. So
(19:05):
I don't know how that's going to work. I don't
normally think that's super activist oversight, but because of all
the weird, you know, stuff that has gone on with
open AI, you know, you know, the California Attorney General
is paying close attention, and so there is some opportunity
for that oversight to matter. The thing I think is
interesting is, like, you know, I've said, this is a
(19:26):
normal company with a founder with a vision, blah blah blah.
But the one thing that makes it not normal is
that Sam Altman owns zero shares of this company, and
I don't know how that plays out, right, Like, one
possibility is that he will get some shares, right, like,
at some point during this reorganization, he will say, as
he sort of said before, like in previous iterations, he
will say, the shareholders, you know, Microsoft SoftBank, However, the
(19:49):
shows really want me to own stock so that I
have properly aligned incentives, and so over my objections, I'm
taking you know, twenty billion dollars worth of open a stock, right, Like,
that's a pop thing that could happen. But it's hard
with this reorganization because now there's this two tier structure
where the nonprofit controls the for profit, and historically open
ai is nonprofit board has not been allowed to own
(20:11):
stock in the for profit in order to keep its
incentives pure, and that reasoning still applies. I don't know
if they'll still do that, but like it still makes
sense to say, if you're on the board of the
nonprofit that is trying to make sure that open ai
does things that are best for humanity, you shouldn't have
a huge economic stake in the for profit subsidiary, because
(20:33):
that would, you know, lead you to make decisions in
the best interests of profit rather than the best interests
of humanity. So I think it actually would be kind
of hard to give him a big slug of stock
now though I don't really know, and then like, you know,
how else can he get paid? I mean, my impression
is that he does not want for material comforts for
a variety of reasons. You know, he has that a
career as a you know, founder and venture capitalist before
(20:56):
open Ai. But he also like you know, like has
all sorts of stakes and also it's of ai j's
and business like, there's a lot of ways for Sam
Altman to fund his lifestyle that are you know, kind
of float around open ai and compose potential conflicts of interest.
So it'll be interesting to watch that because he's not
Mark Zuckerberg er Elon Musk or whatever, where his wealth
(21:16):
is a you know, twelve digit steak in Open Ai.
Speaker 2 (21:19):
I don't know Sam Almon at all obviously, but I
do wonder if like he had a time machine and
he could go back to the founding moments and he
alone was making the decisions, how would he have set
open ai up? Would he have just completely skipped all
this nonprofit drama they're PBC now, But does he wish that,
(21:40):
you know, he had just founded it or it had
been founded as a normal company and he was a
normal startup CEO and it exploded this way.
Speaker 1 (21:46):
It's hard. I think that probably he would have liked
to skip all this drama and like getting sued by
Elon Musk and being subject to the oversight of state attorneys.
Speaker 2 (21:54):
General, getting ousted and then brought back in.
Speaker 1 (21:57):
Yeah, getting ousted and brought back happened to a for
profit ceo as well.
Speaker 2 (22:02):
That's true, and it probably helps with your ORO points.
Speaker 1 (22:05):
Oh yeah, it definitely entrenches his power when he's asked
it and has to be brought back in twenty four
hours because like otherwise the company would collapse. Like that
makes him like pretty essential. But no, I think it
was a mistake to start it as a nonprofit in
the sense that they thought it would be less capital
intensive to build large language models than it was, and
so they you know, we're like, we're going to do
(22:26):
this research funded by donations, and then they realized, oh no,
we need like tens of billions of dollars of donations
and we're not going to get that, so we have
to be a for profit. So I think in that
sense very clearly they would have rather started as a
more normal company so that they could raise money efficiently
without getting sued. By Elon Musk. The only caveat to
that is, like I do think that, like, especially in
(22:46):
the early days, and I think even a little bit now,
the overlap between like top AI researchers and people who
worry about AI alignment is pretty significant. And I think
early on it was like important to be a nonprofit
in order to attract people and like motivate people to
say we're not just like a company, We're building AI
for the benefit of humanity. I think is good for
(23:08):
getting researchers. I'm not sure it is anymore. I think
it was helpful early on, and I'm not sure that
they would have had the success they have had if
they are a pure for profit. But you know, there's
enough like counterexamples where like you know, Google also building ahead,
so I think probably it would have rather started as
a for profit.
Speaker 2 (23:26):
One thing I was curious about as I was reading
one of your columns about this was that this caped
profit model. The company said that it worked when there
was really only one company building generative AI, but in
this era where you have, you know a lot of
companies who are doing this, that they need to switch
to the PBC model. I wasn't quite sure how to
(23:47):
read that, Like, why wouldn't the PBC model make sense
from the beginning? Why would a capped profit model ever
make sense?
Speaker 1 (23:54):
I love the cap profit model I've written about Sam
Alban I've described, but you as a business negging, like
a lot of what happens at open ai is they're like, oh,
you know, we're just gonna make too much money and
it's gonna like destroy the meaning of money. And so
we're just warning you about that if you invest with us,
(24:14):
we're gonna give you so much money back that like
money will lose all meaning. And people are like, oh,
that sounds really good, right, And so there's a lot
of ways to express that, and one of them is
the cap profit be like, guys, I'm really sorry to
tell you, but once we hit a trillion dollar valuation,
we can't give you any more money. And people like, wow,
that sounds pretty good, right. But then, like you know,
you have all these computing AA companies and they're like, well,
(24:34):
we're aiming for a ten trillion dollar valuation. You get
all of it, right, And then it's harder to sort
of use the cap profit model. But when open ai
was the only game in town, those warnings were so
like grandiose that I think they were appealing to investors also,
like you know, even if they weren't appealing, even they
were bad people, Well, this is the only game in town.
Like if you know, if I want AI exposure, I'll
get this AI exposure up to a cap as opposed
(24:56):
to nothing. Right, but if they're not the only game
in town, people rather not of the cap.
Speaker 2 (25:00):
Now they're competing with anthropic to learn like thirty billion
dollars from soft Bank, so soft Bank would want something cleaner. Yeah, absolutely,
that makes sense. Shall we take a hard left turn
(25:28):
and talk about medicaid?
Speaker 1 (25:31):
Right, like the other end of the spectrum.
Speaker 2 (25:32):
What a great racket state governments and hospitals have going on.
Speaker 1 (25:36):
I used to be an equity of his banker, and
one thing that I did. I'm not going to get
into the details convertible bond call options over this, but
like what you do is you're like you go to
a company and you're like, we're going to sell you
it's a product, right, and then it costs you like
sixty million dollars. You're ready to check to us for
sixty million dollars and the irs will cut your taxes
(25:59):
by eighty million dollars. And also the product has other
nice features, but like you know, the IRS will more
than pay you for the product. This is always true,
but it is occasionally true sometimes that iOS would pay
for half of the product. Derote as banker for years
before I figured out what I was doing, But like
when you sort of figure out what you're doing, like,
oh my gosh, Like all products should be like this.
(26:20):
All products should be like two people get in a
room and one of them is like, I'm going to
sell you this thing, and someone else is going to
pay for it, and then like you know, like you
have a great time because like you're not like fighting
to divide the pie because like someone else is like
providing you the pie. That's what's happening in Medicaid, right, So,
like what I wrote about this week is like there's
a Times article about Republicans in Congress trying to get
(26:41):
rid of the Medicaid provider tax racket loophole. One state
government calls it meta scam, but basically the idea is
like Medicaid is like hospitals or doctors or frequently like
managed care organizations provide medical care to people who can't
afford it under or insured under medicaid, and they charge
(27:04):
the government for that. And typically the way it works
is that the state government pays some portion of the
cost and the federal government pays some other portion of
the cost. It's like, I think it averages to the
federal government pays sixty percent, the state government pays forty percent,
and the state is sort of like in charge of
negotiating with the hospitals. And so someone figured out that
(27:30):
if the state is paid more, then the federal government
would match more, and then the state would have, you know,
a higher cost, but it would get more money from
the federal government. And then what the state can do
is it can tax the manage care organizations or the
hospitals or whoever is provided in care. It can impose
a special tax on them that takes back the money
(27:51):
that the state paid. So ultimately the state is paying
less and the federal government is paying more, and like
there's like a refund or a payback from the hospitals
paying the tax to the state. And someone figured this out,
and someone figured out in the eighties, and like in
the nineties, Congress passed laws basically regulating how you could
(28:12):
do this, and the states have gotten better and better
at gaming the regulations ever since, and they like cheapen
the cost of Medicaid to the state by like finding
ways to make the federal government pay more than it's
supposed to. And now Congress is looking again into eliminating
that because it does look like cheating.
Speaker 2 (28:28):
Apparently House Speaker Mike Johnson has backed away from this
because it would be so politically toxic for Republicans in
swing states.
Speaker 1 (28:37):
Yeah, because it's like a scam. Yeah, but it's a
scam in the service of providing medical care. Like, it's
a scam, but it's not like the state governments are
using it to buy Lamborghinis, right, It's like they're using
it to provide medical care while like not squeezing their
budgets too much.
Speaker 2 (28:51):
Right.
Speaker 1 (28:51):
And if you take away this scam, then the states
that do it have to either like cut back drastically
on Medicaid or like raise their taxes. And yeah, nobody's
that excited to do that. And so that's why this
this scam has persisted because it achieves a basically acceptable
political outcome. Right, either someone has to pay for this
care or it has to not be provided and like
either of those things are sort of toxic, and so
(29:12):
making the federal government pay for it is kind of
like the easiest choice, and they're doing it in a
scammy way. And you could imagine a world in which
the federal government said, you know, instead of all this
like gamesmanship, what we're gonna do is federalized medicaid and
we'll just pay for all of it and will negotiate
the prices ourselves and it'll be easier. But that doesn't
seem that likely to happen in the near future, and
(29:33):
so you.
Speaker 2 (29:33):
Have this scamming no, and in the meantimes, it seems like,
you know, they're happy to just let this persist as
it is. It's funny, so forty nine states employ this.
I mean New Hampshire, I think, is the one that
calls it meda scam but basically.
Speaker 1 (29:47):
Invented in New Hampshire. Yeah.
Speaker 2 (29:50):
Do you know the one state that does not use
medicaid providers taxes?
Speaker 1 (29:54):
Isn't it Alaska?
Speaker 2 (29:55):
It is Alaska? And I find that charming. Yeah. I
was reading a CBS News article about this, and I
thought this was interesting. I think in the article, one
of the health providers they talked to said that we're
still losing money on Medicaid patients, but it goes from
like sixty percent coverage to eighty percent coverage or how
much they're actually getting paid. But they quoted a Colorado
(30:17):
based health system, link in Health saying that it paid
five hundred thousand dollars in provider taxes, but it netted
more than three point six million dollars extra from Medicaid
according to its CEO, which is like fifteen percent of
its budget.
Speaker 1 (30:31):
And that's how it's supposed to work. Like, the regulations
around how states are allowed to do this are complicated,
but the basic idea of the regulations is that if
you have a provider tax, you're supposed to redistribute money
from like non Medicaid hospitals to like Medicaid hospitals. So
it's supposed to actually improve the allocation to Medicaid. Right,
(30:51):
it can't just be a refund from Medicaid. It has
to be helpful to the hospitals that tread a lot
of Medicaid patients. States have found ways to abuse that,
but that's not even true. But like, that's the basic
idea is it's supposed to be good for the hospitals
that treat a lot of Medicaid patients.
Speaker 2 (31:07):
I just like this as an example of a tax
that hospitals or anyone else is happy to pay.
Speaker 1 (31:12):
I love it as an example of like gams and
ship right, and like I do the analogy to like
cope assistance programs, which is like drug companies. If you
have insurance to buy like traumaceuticals, and you have a
twenty percent COPE, then a drug company will be like, well,
we'll make the cost of the drug ten thousand dollars,
and then you'll have a two thousand dollars cope, and
we'll just give you the two thousand dollars cope. We'll
(31:33):
just we'll pay it for you. And then the insurance
company will pay the drug company eight thousand dollars and
the drug company will be better off than if it
had just charged to do a normal and that for
the drug. And like that's also regulated, but it's also
like a thing you can do a little bit at
the margins.
Speaker 2 (31:44):
Right.
Speaker 1 (31:45):
But the other analogy I was thinking of, and this
is like a tax that people are happy to pay
sort of is a salt tax deduction. Right, So like
historically Americans have been able to deduct their state and
local taxes on their federal taxes. So if you pay
ten thousand dollars or state taxes, that reduces your federal
income by ten thousand dollars. And in the first Trump administration,
(32:06):
I think they capped that at like ten thousand dollars.
If you make a lot of money and live in
a high tax state, you can't deduct all of your
state taxes, and people, you know immediately got to work
figuring out how to game that. And one classic effort
that I've written about is that the state could set
up a charity, right, and the charity is in the
business just like providing state programs. Right, the charity is
(32:28):
just an arm of the state, and you can make
a donation to the charity, and if you make a
donation to the charity, it's deductible from your federal taxes.
And it also reduces one for one your state taxes,
because they'll say, oh, that just counts a state taxes,
so like, it's not a state tax for federal income
tax purposes, but it reduces your state taxes. People tried
that and the irs said no, So that doesn't work.
(32:50):
But it's a good effort. But the one that I
really like is if you have business income in that
pass through a business so like most classically, if you're
a partner at a law firm, partner at law firm,
you get your share of the partnership's income just as
your personal income. Like that's normally how it works, Like
it just goes on your personal tax return and you
pay taxes on it. But states figured out that they
(33:12):
could make the state tax live at the business level.
So the business pays the state tax, the business can
deduct the state tax for federal purposes because it's a
business expense, right, and then you as a partner, get
lower federal taxes and so like, law firm partners and
like some other partners of businesses can sometimes avoid the
(33:34):
state and local tax deduction cap by like a negotiated
tax that they've worked out with their state. So like,
there's a lot of this where like state tax authorities
and people and businesses try to work out ways to
maximize their own take at the expense of the federal
tax take. And this is one of them.
Speaker 2 (33:54):
It's just another example of that that game and ship.
Speaker 1 (33:57):
As I started by saying, like this is my career
for I love I love people. Dividing up text.
Speaker 2 (34:02):
Benefits our listeners can't see. But there's a certain sparkle
in math. As he describes this, it's.
Speaker 1 (34:10):
Like a lot of tiredness in my eyes. And that
was The Money Stuff Podcast.
Speaker 2 (34:17):
I'm Matt Luvian and I'm Katie Greifeld.
Speaker 1 (34:20):
You can find my work by subscribing to The Money
Stuff newsletter on Bloomberg.
Speaker 2 (34:23):
Dot com, and you can find me on Bloomberg TV
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Speaker 1 (34:30):
We'd love to hear from you. You can send an
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Speaker 2 (34:37):
You can also subscribe to our show wherever you're listening
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Speaker 1 (34:42):
The Money Stuff Podcast is produced by Anna Maserakus and
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Speaker 2 (34:46):
Our theme music was composed by Blake.
Speaker 1 (34:48):
Maples, Brandon Francis Nudimss our executive producer, and Stage Bauman
is Bloomberg's head of Podcasts. Thanks for listening to The
Money Stuff Podcast. We'll be back next week with more stuff.
The l
Bloomberg Audio Studios, podcasts, radio news. I've been up since
like three point thirty this morning because I saw a
raccoon and barked at him, and then we have to
go outside and chase the raccoon.
Speaker 2 (00:16):
And that took.
Speaker 1 (00:18):
That just woked me up, and then I just didn't
get back to sleep. I get it pretty early anyway.
Speaker 2 (00:22):
That's brutal.
Speaker 1 (00:22):
My kid's got to boss them. Mostly, I have always
been pretty good sleepers. The dogs turn today.
Speaker 2 (00:30):
I feel like we should note that we're in two
separate places right now.
Speaker 1 (00:33):
We're in two separate places. I'm in the Bloomberg podcast studio,
which is really cool.
Speaker 2 (00:38):
I'm at home, so I actually feel somewhat prepared for this, which.
Speaker 1 (00:42):
Is oh wow. I don't. It's gonna be great. It's
gonna be all you.
Speaker 2 (00:45):
I don't feel that prepared. But let's let's dive in. Hello,
something huge, Oh wait, we have to we have.
Speaker 1 (00:52):
To do you don't have to go ab something huge.
Speaker 2 (00:54):
Happened, something huge, the introduction. People know who we are,
we speak for ourselves.
Speaker 1 (01:01):
Hello's Somebody's the thodcast, the stuff with the money. I'm mad,
let's kitty, let's go all.
Speaker 2 (01:06):
Right, let's go Warren Buffett.
Speaker 1 (01:11):
Wow, I tell you it happened over the weekend. Berkshire Hathaway.
Cheryloy reading Warren Buffer was like, by the way, I'm
out at the end of the year, and you know,
as happens on the weekend. I'm like, I got to
write about this. On Monday, my WORFA was like, this
really news. It's a ninety four year old man retiring.
Speaker 2 (01:30):
It's like, yeah, it is kind of funny and charming.
How shocking it was, I mean not shocking, but still
the only theme. Everyone was surprised, even though we also
knew who his successor was going to be. Yeah, because
it's been teased since like twenty twenty one.
Speaker 1 (01:47):
Not to be morbid, but like, if you are well regarded,
successful person who is working successfully at age ninety four,
people have a reason not to expect you to retire.
That's like I'm going to be carried out, you know.
So it's interesting that is your time.
Speaker 2 (02:03):
But at the same time, I feel like one of
your legacies will be how well you pick your successor.
Speaker 1 (02:09):
That's true, but you're right, I mean, we knew who
the successor was, but yeah, it's like having a sort
of orderly transition is useful.
Speaker 2 (02:15):
I kind of want to talk about Craig Abel. I
mean not to be disrespectful to Warren Buffett, but he's
interesting in that he doesn't have much of an investing background.
Like you think about do you think about Charlie Munger,
you think about Warren Buffett, you think about fantastic investors,
And he doesn't necessarily have that resume. He's more of
an operator, like a business operator.
Speaker 1 (02:36):
It's so unique to have a big company that is
sort of best known as a vehicle for a guy's
stock picks, and like the guy who made the stock picks,
it's really good at making stock picks, right, And so
it's like there's a lot of value created in that company.
But also you know, they bought a lot of companies
that they operate and manage, and it would be surprising
(03:01):
if they took that giant company and transitioned it to
like the second greatest stockpicker ever, right, Like it sort
of makes sense to be like, well, like railroads and transcommusation,
we should make the CEO a guy who knows how
to run railroads and hopefully the stock picking will take
care of itself. But like it would be weird if
they picked a guy with a stockpicking back gund because
you'd have to run a company.
Speaker 2 (03:21):
Yeah, that's what he's going to do. I mean, I
read something I forget who it was from which publication,
but you know, you think about Berkshire Hathaway. It has
lessened its reliance on like the insurance side of things.
It's a lot of the energy business now, and that's
obviously where greg Abel, that's his sandbox. At the same time, though,
it is fun to think about what Berkshire Hathaway under
(03:45):
greg Abel could look like. There's a lot of speculation
that maybe we could see some spin offs. It's this huge,
sprawling conglomerate with like four hundred thousand employees. Do you
start to break things apart a little bit? So far,
greg Able seems to be saying that obviously they're going
to continue on the track they're on. But it's fun
to imagine.
Speaker 1 (04:04):
It's pretty early days for him since.
Speaker 2 (04:06):
He's not in charge, you know, but he's had a
long time to think about it. And it's true it
doesn't take over until January first of twenty twenty six,
but I don't know. I imagine in his idle day dreams,
he thinks about what he's going to do.
Speaker 1 (04:20):
It is in so many ways a weird company, including
just being a sprawling conglomerate is not really you know,
hasn't been in vogue for forty years now. And there
are a lot of things that Berkshire gets away with
or like is beloved for because of Warren Buffett's presence.
But without Warren Buffett's presence, you know, at some point
someone's gonna be like, wow, we could use capital more efficiently.
We could you know, have a cleaner story to tell
(04:42):
toone because the story you tells the investors now was like, ah,
look it's Warren Buffett, right, but like you can't tell
that story anymore, and then you have to tell a
story like you know, ooh or an energy company or whatever. Right,
you go from having this very straightforward, very widely appealing
story about Berkshire Hathlo to being like, well, we do
mobile homes and you know we have candy candy, Yeah,
(05:03):
we want a big chunk of apple for some reason.
You know, it's like when it's like all of this
disparate stuff is stuff that Warren Buffett likes. Everyone, Oh,
Warren Buffett likes it, but it's like all this disparate
stuff that Warren Buffett liked a long time ago, then
it's like a less compelling story.
Speaker 2 (05:19):
Also a question maybe they'll have to confront is you know,
we don't pay a dividend, which is fine because you
had Warren Buffett there, But now maybe they'll start paying
a dividend. I don't know.
Speaker 1 (05:29):
Yeah, it's the thing I think about a lot, right,
Like I write often a headline, a section header. People
are worried about stock buybacks, right Like, there's this idea
that like, either a company allocate's capital, right like, it
has money and it uses that to invest in building
factories or buying other companies or doing whatever it does
with the capital, or it returns the capitol to shareolders
(05:51):
and says you would do a better job of investing
this capital than we would. Right Nobody is agitating for
Berkshire to return capital. The shit sareholders because if you're
an investor in Berkshire, you're not buying a piece. You're like, oh,
I'm making you like a very focused bet on like
energy or whatever. Right You're not like I just want
like their energy exposure. You're buying because you want Warren
Buffet exposure. And you're buying it because you're certain that
(06:14):
Warren Buffett is a better alligator of capital than you are. Right,
you're buying it because you want Warren Buffett, you know
who has the giant cash pile. You're willing to wait
around until he finds what he wants to do with
that cash pile because you're certain that he's going to
do a better job invest in that cash pile than
you are. But like most companies, there's some shareholder agitation
to say, look, you CEO of a company, if you
(06:39):
hang on to a lot of cash, you'll probably to
play it in some wasteful way. You'll probably like do
some vanity project or like invest in some dumb idea.
You should returned the cash to shareholders, and the shareolders
will do a better job of figuring out what to
do with the cash then you will. Yeah, and once
Warren Buffet Lelys called those normal pressures kind of come
into play.
Speaker 2 (06:55):
For those keeping track at home, the cash pile is
currently a like three hundred and fifty billion dollars, so
it's quite a bit.
Speaker 1 (07:01):
That's a big dividend.
Speaker 2 (07:02):
I'm interested to see what happens to the shares in general.
We talk about the so and so premium on the
show frequently. Usually it's the Elon Musk premium. In this
case it's the Warren Buffett premium, which ties into the
discussion over the dividend nicely.
Speaker 1 (07:18):
Yeah, I don't have a great empirical sense of how
big the Warren Buffet premium is. I've heard people argue
that it has historically been large and it's smaller now
because even like three months ago, like you were discounting
your relatively short period of the Warren Buffett premium, right,
You're like, well, Warren Buffett will be investing this money
for some period of time, but not perpetuity. But yeah,
(07:39):
it's interesting to see what the Buffet premium will sort
of watch out to be.
Speaker 2 (07:43):
So we're talking about greg Abel, the successor to Moren
Buffett in Berkshire Hathaway, but perhaps a less formula has
also emerged this week. Can I guess, please.
Speaker 1 (07:58):
Guess?
Speaker 2 (07:58):
Friend of the show, black Man Bill Ackman. He's executive
chairman of Howard Hughes. He finally did.
Speaker 1 (08:04):
He's striking while the iron is hot, Like these are
like simultaneous actions, right, like he like strike his deal
with Howard Hughes to take like almost control forty.
Speaker 2 (08:14):
Seven of Howard Hughes holdings. So he is weighing plans
to build and insure expand the real estate company's remit
and as he stated plenty of times before, he's trying
to basically model himself after Berkshire, Hathaway become a modern
day Berkshire. And the timing was interesting. Buffett announced this
(08:37):
over the weekend and then this news for Bill Ackman
broke on Monday. So maybe they just guess at the
time their real rush.
Speaker 1 (08:44):
To get get it done, Like it's like twenty four
hours to start the new.
Speaker 2 (08:49):
Four hour turnarounds.
Speaker 1 (08:50):
Yeah, it is like Berkshire in the sense that it
is not an insurance company that he is acquiring control
of in order to eventually at an insurance company like Berksure.
Hathway started as a textile company and then like you know,
a wired insurance and insurance turned out to be a
big part of Buffet's success, right because you have like
(09:11):
the sort of like cheap non callable leverage that allows
you to make a lot of interesting bets. The Lackman
would also like to do that but acquiring and ensure
it would be too easy, so he acquired a real
estate company to build his Berkshire out of. I don't know, Yeah,
it is interesting to me as a guy who like
reads and writes about like hedge funds and high ricercy
(09:32):
trading prims and stuff. How are the eard Warren Buffett
is for doing this like really old school thing, which
is like fundamental analysis, long term buy and hold long
investing in stocks.
Speaker 2 (09:44):
Right.
Speaker 1 (09:44):
I mean he also, you know, as we're talking about,
like he also runs a conglomerate, right, and there's a
lot of operating businesses there. But like he's famous for
being like ooh, I like coke. I'll buy coke and
coke COO's op. Right, and he holds it for decades.
And when you look around it like people who are
financial celebrities these days forty years ago, like Warren Buffett
was the best of a group of people who are
competitors in that business. Right, Like you know you would
(10:07):
comp him to like celebrity mutual fund managers. Right, but
you look at it like financial celebrities these days, there's
not a lot of that, you know, It's mostly like
people who run hedge funds and are not giving you
long exposure to large cap equities, but that they are
doing some more complicated, more market neutral, more like alpha
generating thing. Stockpickers not stock pickers, and certainly not like
(10:27):
very long term stockpickers. And the guy who has really
positioned himself as being that is Bill Ackman, right, Like
you look at his fund and it's you know whatever,
it's like twelve or fourteen names that don't turn over
that often, right, And I'll tell you know, they do
derivative stuff on the side to the kind of like
smooth returns, but like the main business is like long
term fundamental stock picking. So it is interesting that he
(10:50):
wants to get into the Warren Buffett game and he's
like the only person who's doing the thing that Warren
Buffett was doing, which I think is you know, kind
of passe in many respects, but you know, it still
has an obvious appeal.
Speaker 2 (11:14):
If you thought the Berkshire Hathaway was an unusual company
not a normal company, boy, do I have a corporate
structure for you? Open ai.
Speaker 1 (11:24):
See I think that open aa is a normal tech company,
Like I think open a is totally normal. Open Ai
is a private tech company that is backed by venture capitalists.
And also Microsoftware is a big stake and like Softing, Right,
so the classic capital structure except for Microsoft like venture
capitalist and has like a giant slug up money from Softing,
and it is run by a charismatic visionary CEO, Sam Altman,
(11:48):
And the explicit proposition of the company to like investors is, look,
we're not going to like be focused on maximizing profits
for you in the short term. We're not going to
be run as a business. We have a vision about
what is good for humanity, and we're going to pursue
that long term vision. And when I say we, I
mean Sam Altman has a vision for what is good
(12:09):
for humanity and he's going to pursue that long term
vision and shareholders will not have much ability or desire
to meddle with that in the pursuit of short term profits.
And that's like very explicitly the proposition that like Facebook
put in its ip of perspectives, and that has become
like standard in Silicon Valley, right, It's like what you
want as a venture capitalist is a visionary CEO with
(12:31):
a like mission that is not the short term pursuit
of profit but has some grand vision of like humanity's
future and you want to invest in that and kind
of like take your hand off the wheel and let
the visionary CEO cook. And that's what's happening here. But
it's like it's like a nonprofit. There's like all this stuff,
but like that's what's happening, right. Like the news is
(12:53):
that like open Aye is a nonprofit that controls a
for profit basically, and they were going to convert to
being a regular for profit and now they're not, and
instead they're gonna be you know, there's gonna be like
a for profit company and it's gonna be pretty normal,
and it's gonna have shareholders and one of the big
shareholders will be the open AI nonprofit. But the nonprofit
(13:14):
will control it, right, it will have I've said it'll
have super voting shares something that like rhymes with that, right,
Like maybe it'll have super voting shares. Maybe it'll have
a contractual right to appoint the board, but it'll appoint
the board of the for profit. And you know who
will run the nonprofit, Well, there's a nonprofit board and
like the board will sort of perpetuate itself, right, Like
the current board will pick future board members, and like
(13:36):
the board is like I don't want to say handpicked
by Sam Altman, but like there was a nonprofit board
that fired Sam Altman and then he came back, and
as a condition of him coming back, he fired that
board and replaced it with his board. So you know,
who's gonna disagree with his vision of what's best for humanity?
Like SoftBank probably not so. I just think it's like
(13:56):
a very normal tech company with like a lot of
weird like thing. Yeah, it's a story that like you've
heard before about Facebook.
Speaker 2 (14:03):
You know, I find it a little bit exhausting, Like
the lip service. Maybe it's not lip service, but that
these visionary founders pay to like bettering humanity makes a
little bit more sense when you're talking about the mission
of open Ai. The mission of Facebook is pretty rich.
I mean when you phrase it that way, it just
sounds like another form.
Speaker 1 (14:20):
I believe it in some form, you know, it's.
Speaker 2 (14:24):
It kind of it rhymes with it.
Speaker 1 (14:26):
It's like very grandiose, right, Yeah, it's in many ways
like one person's idiosyncratic vision of benefiting humanity. Right, there's
a broad category of ways that AI can go where
Sam Altman will be like that was great for humanity,
and everyone else will be like, no, it wasn't right,
Like that's like a distinctly possible outcome.
Speaker 2 (14:42):
Yeah, so how it stands right now? So Sam Altman
wanted to completely separate from the nonprofit board his nonprofit
over verseers. That's not happening. They're now a PBC, which
it seems like wasn't a common structure until you started
seeing these AI labs.
Speaker 1 (15:00):
Yeah, there were a bunch of them. Like it's been
a thing for like more than a decade.
Speaker 2 (15:04):
Nap.
Speaker 1 (15:04):
Yeah, the non open AI AI labs got really into
being public benefit corporations. The idea of a PBC is
that you can run the company. The board can run
a company with like the explicit ability to consider things
other than shareholders right to consider the good of humanity,
which I kind of think companies can do. Anyway, I
don't know how material it is to be a PBC,
I mean, reading between the lines, just the teeny bit.
(15:25):
They wanted to be a for profit company where the
nonprofit board owned a minority of the shares and a
majority of the directors were elected by normal shareholders, and
what they have now gotten is that, except that the
nonprofit board controls the for profit board controls the you know,
as a majority of voting stake in the for profit company,
(15:49):
and so it gets to a point the board of
the for profit company. But it's a pretty minor difference,
I think, well, sorry, it's not a minor difference. It's
a minor structural difference. It's a major difference whether the
company is sort of alter controlled by a board answerable
to shaholders, or ultimately controlled by a board you know,
answerable to the good of humanity as somewhat filtered through
(16:10):
Sam Maltman's visions.
Speaker 2 (16:12):
I don't know. Again, it kind of reminds me of
ESG because you think about oil companies getting dinged for
not prioritizing shareholders and starting to like care about the environment.
Maybe if they were PBCs, they would be insulated from
those critiques.
Speaker 1 (16:26):
Yeah. I think it'd be hard to convert a whole
company to a PBC, but it would be interesting to try.
Speaker 2 (16:30):
Yeah, it would be fun. If I were starting a
company right now, I would probably structure myself as a PBC.
It seems like it just gives you a layer of protection.
Speaker 1 (16:39):
Yes, yes, exactly like a PBC. This is what I'm
saying about. Like the vision if you're any like a
PBC at the margin, makes you less answerable to shareholders
and gives you more ability to be like, no, we're
considering other stakeholders or other interests, right, and like that's
always additive to the flexibility of a CEO and a board.
Speaker 2 (16:56):
Right.
Speaker 1 (16:56):
It always gives you an ability to say no to
something you don't want to do because you're like, oh,
we can a difference stakeholder, right, Like it's insulation from pressure, right.
And it is phrased or interpreted as like, this company
has more obligations because it has obligations to humanity as
well as sharelders, But in fact, it means it has
fewer obligations because it means it doesn't have like a
binding obligation to shaolders in the same way that a
(17:18):
regular company does. And like the obligations to humanity are
not particularly binding, and so you just get to make
more decisions based on what you want to do rather
than what the s shelders want. This is my cynical take.
Speaker 2 (17:29):
I like this, so, I mean, I don't know, it's
just it's a it's humanity is a broad church, and
what's good for it is open to interpretation.
Speaker 1 (17:38):
I do. I'm gonna say two other things about this.
So one, I'm saying that open AI is now in
a position where it can do what it thinks is
best for humanity based on Sam Waltman's vision or what
is best for humanity. That's not quite true. So first
of all, there is a board, and the board you know,
has to exercise its own independent judgment, and like you know,
it's not totally under the control of Sam Waldman, who
(17:58):
is not a sheldering, because only whatever moral power he
brings to it, and like one board seat, moral power
is quite big because when he got fired, all the
board got fired too. But anyway, but the other person
who has a lot of say over open AI's vision
for humanity is the Attorney General of the state of California,
also other attorneys like Delaware, but like largely California. Because
open a is controlled by a nonprofit, the nonprofit is
(18:21):
subject to like state attorney general jurisdiction, and the attorney generals,
particularly of California, had a lot of input into this
this for profit conversion. And I think still do like
get to sign off on like the current structure, and
they presumably have some power going forward. If, like open AI,
(18:43):
the nonprofit says we are going to appoint Skydeat to
the board of the public company so it can slay humanity,
the California Attorney General can be like, no, that's not
in the best interests of humanities who don't do it right.
There's some oversight of nonprofits that exists here that wouldn't
exist if it was just a regular public company. So
(19:05):
I don't know how that's going to work. I don't
normally think that's super activist oversight, but because of all
the weird, you know, stuff that has gone on with
open AI, you know, you know, the California Attorney General
is paying close attention, and so there is some opportunity
for that oversight to matter. The thing I think is
interesting is, like, you know, I've said, this is a
(19:26):
normal company with a founder with a vision, blah blah blah.
But the one thing that makes it not normal is
that Sam Altman owns zero shares of this company, and
I don't know how that plays out, right, Like, one
possibility is that he will get some shares, right, like,
at some point during this reorganization, he will say, as
he sort of said before, like in previous iterations, he
will say, the shareholders, you know, Microsoft SoftBank, However, the
(19:49):
shows really want me to own stock so that I
have properly aligned incentives, and so over my objections, I'm
taking you know, twenty billion dollars worth of open a stock, right, Like,
that's a pop thing that could happen. But it's hard
with this reorganization because now there's this two tier structure
where the nonprofit controls the for profit, and historically open
ai is nonprofit board has not been allowed to own
(20:11):
stock in the for profit in order to keep its
incentives pure, and that reasoning still applies. I don't know
if they'll still do that, but like it still makes
sense to say, if you're on the board of the
nonprofit that is trying to make sure that open ai
does things that are best for humanity, you shouldn't have
a huge economic stake in the for profit subsidiary, because
(20:33):
that would, you know, lead you to make decisions in
the best interests of profit rather than the best interests
of humanity. So I think it actually would be kind
of hard to give him a big slug of stock
now though I don't really know, and then like, you know,
how else can he get paid? I mean, my impression
is that he does not want for material comforts for
a variety of reasons. You know, he has that a
career as a you know, founder and venture capitalist before
(20:56):
open Ai. But he also like you know, like has
all sorts of stakes and also it's of ai j's
and business like, there's a lot of ways for Sam
Altman to fund his lifestyle that are you know, kind
of float around open ai and compose potential conflicts of interest.
So it'll be interesting to watch that because he's not
Mark Zuckerberg er Elon Musk or whatever, where his wealth
(21:16):
is a you know, twelve digit steak in Open Ai.
Speaker 2 (21:19):
I don't know Sam Almon at all obviously, but I
do wonder if like he had a time machine and
he could go back to the founding moments and he
alone was making the decisions, how would he have set
open ai up? Would he have just completely skipped all
this nonprofit drama they're PBC now, But does he wish that,
(21:40):
you know, he had just founded it or it had
been founded as a normal company and he was a
normal startup CEO and it exploded this way.
Speaker 1 (21:46):
It's hard. I think that probably he would have liked
to skip all this drama and like getting sued by
Elon Musk and being subject to the oversight of state attorneys.
Speaker 2 (21:54):
General, getting ousted and then brought back in.
Speaker 1 (21:57):
Yeah, getting ousted and brought back happened to a for
profit ceo as well.
Speaker 2 (22:02):
That's true, and it probably helps with your ORO points.
Speaker 1 (22:05):
Oh yeah, it definitely entrenches his power when he's asked
it and has to be brought back in twenty four
hours because like otherwise the company would collapse. Like that
makes him like pretty essential. But no, I think it
was a mistake to start it as a nonprofit in
the sense that they thought it would be less capital
intensive to build large language models than it was, and
so they you know, we're like, we're going to do
(22:26):
this research funded by donations, and then they realized, oh no,
we need like tens of billions of dollars of donations
and we're not going to get that, so we have
to be a for profit. So I think in that
sense very clearly they would have rather started as a
more normal company so that they could raise money efficiently
without getting sued. By Elon Musk. The only caveat to
that is, like I do think that, like, especially in
(22:46):
the early days, and I think even a little bit now,
the overlap between like top AI researchers and people who
worry about AI alignment is pretty significant. And I think
early on it was like important to be a nonprofit
in order to attract people and like motivate people to
say we're not just like a company, We're building AI
for the benefit of humanity. I think is good for
(23:08):
getting researchers. I'm not sure it is anymore. I think
it was helpful early on, and I'm not sure that
they would have had the success they have had if
they are a pure for profit. But you know, there's
enough like counterexamples where like you know, Google also building ahead,
so I think probably it would have rather started as
a for profit.
Speaker 2 (23:26):
One thing I was curious about as I was reading
one of your columns about this was that this caped
profit model. The company said that it worked when there
was really only one company building generative AI, but in
this era where you have, you know a lot of
companies who are doing this, that they need to switch
to the PBC model. I wasn't quite sure how to
(23:47):
read that, Like, why wouldn't the PBC model make sense
from the beginning? Why would a capped profit model ever
make sense?
Speaker 1 (23:54):
I love the cap profit model I've written about Sam
Alban I've described, but you as a business negging, like
a lot of what happens at open ai is they're like, oh,
you know, we're just gonna make too much money and
it's gonna like destroy the meaning of money. And so
we're just warning you about that if you invest with us,
(24:14):
we're gonna give you so much money back that like
money will lose all meaning. And people are like, oh,
that sounds really good, right, And so there's a lot
of ways to express that, and one of them is
the cap profit be like, guys, I'm really sorry to
tell you, but once we hit a trillion dollar valuation,
we can't give you any more money. And people like, wow,
that sounds pretty good, right. But then, like you know,
you have all these computing AA companies and they're like, well,
(24:34):
we're aiming for a ten trillion dollar valuation. You get
all of it, right, And then it's harder to sort
of use the cap profit model. But when open ai
was the only game in town, those warnings were so
like grandiose that I think they were appealing to investors also,
like you know, even if they weren't appealing, even they
were bad people, Well, this is the only game in town.
Like if you know, if I want AI exposure, I'll
get this AI exposure up to a cap as opposed
(24:56):
to nothing. Right, but if they're not the only game
in town, people rather not of the cap.
Speaker 2 (25:00):
Now they're competing with anthropic to learn like thirty billion
dollars from soft Bank, so soft Bank would want something cleaner. Yeah, absolutely,
that makes sense. Shall we take a hard left turn
(25:28):
and talk about medicaid?
Speaker 1 (25:31):
Right, like the other end of the spectrum.
Speaker 2 (25:32):
What a great racket state governments and hospitals have going on.
Speaker 1 (25:36):
I used to be an equity of his banker, and
one thing that I did. I'm not going to get
into the details convertible bond call options over this, but
like what you do is you're like you go to
a company and you're like, we're going to sell you
it's a product, right, and then it costs you like
sixty million dollars. You're ready to check to us for
sixty million dollars and the irs will cut your taxes
(25:59):
by eighty million dollars. And also the product has other
nice features, but like you know, the IRS will more
than pay you for the product. This is always true,
but it is occasionally true sometimes that iOS would pay
for half of the product. Derote as banker for years
before I figured out what I was doing, But like
when you sort of figure out what you're doing, like,
oh my gosh, Like all products should be like this.
(26:20):
All products should be like two people get in a
room and one of them is like, I'm going to
sell you this thing, and someone else is going to
pay for it, and then like you know, like you
have a great time because like you're not like fighting
to divide the pie because like someone else is like
providing you the pie. That's what's happening in Medicaid, right, So,
like what I wrote about this week is like there's
a Times article about Republicans in Congress trying to get
(26:41):
rid of the Medicaid provider tax racket loophole. One state
government calls it meta scam, but basically the idea is
like Medicaid is like hospitals or doctors or frequently like
managed care organizations provide medical care to people who can't
afford it under or insured under medicaid, and they charge
(27:04):
the government for that. And typically the way it works
is that the state government pays some portion of the
cost and the federal government pays some other portion of
the cost. It's like, I think it averages to the
federal government pays sixty percent, the state government pays forty percent,
and the state is sort of like in charge of
negotiating with the hospitals. And so someone figured out that
(27:30):
if the state is paid more, then the federal government
would match more, and then the state would have, you know,
a higher cost, but it would get more money from
the federal government. And then what the state can do
is it can tax the manage care organizations or the
hospitals or whoever is provided in care. It can impose
a special tax on them that takes back the money
(27:51):
that the state paid. So ultimately the state is paying
less and the federal government is paying more, and like
there's like a refund or a payback from the hospitals
paying the tax to the state. And someone figured this out,
and someone figured out in the eighties, and like in
the nineties, Congress passed laws basically regulating how you could
(28:12):
do this, and the states have gotten better and better
at gaming the regulations ever since, and they like cheapen
the cost of Medicaid to the state by like finding
ways to make the federal government pay more than it's
supposed to. And now Congress is looking again into eliminating
that because it does look like cheating.
Speaker 2 (28:28):
Apparently House Speaker Mike Johnson has backed away from this
because it would be so politically toxic for Republicans in
swing states.
Speaker 1 (28:37):
Yeah, because it's like a scam. Yeah, but it's a
scam in the service of providing medical care. Like, it's
a scam, but it's not like the state governments are
using it to buy Lamborghinis, right, It's like they're using
it to provide medical care while like not squeezing their
budgets too much.
Speaker 2 (28:51):
Right.
Speaker 1 (28:51):
And if you take away this scam, then the states
that do it have to either like cut back drastically
on Medicaid or like raise their taxes. And yeah, nobody's
that excited to do that. And so that's why this
this scam has persisted because it achieves a basically acceptable
political outcome. Right, either someone has to pay for this
care or it has to not be provided and like
either of those things are sort of toxic, and so
(29:12):
making the federal government pay for it is kind of
like the easiest choice, and they're doing it in a
scammy way. And you could imagine a world in which
the federal government said, you know, instead of all this
like gamesmanship, what we're gonna do is federalized medicaid and
we'll just pay for all of it and will negotiate
the prices ourselves and it'll be easier. But that doesn't
seem that likely to happen in the near future, and
(29:33):
so you.
Speaker 2 (29:33):
Have this scamming no, and in the meantimes, it seems like,
you know, they're happy to just let this persist as
it is. It's funny, so forty nine states employ this.
I mean New Hampshire, I think, is the one that
calls it meda scam but basically.
Speaker 1 (29:47):
Invented in New Hampshire. Yeah.
Speaker 2 (29:50):
Do you know the one state that does not use
medicaid providers taxes?
Speaker 1 (29:54):
Isn't it Alaska?
Speaker 2 (29:55):
It is Alaska? And I find that charming. Yeah. I
was reading a CBS News article about this, and I
thought this was interesting. I think in the article, one
of the health providers they talked to said that we're
still losing money on Medicaid patients, but it goes from
like sixty percent coverage to eighty percent coverage or how
much they're actually getting paid. But they quoted a Colorado
(30:17):
based health system, link in Health saying that it paid
five hundred thousand dollars in provider taxes, but it netted
more than three point six million dollars extra from Medicaid
according to its CEO, which is like fifteen percent of
its budget.
Speaker 1 (30:31):
And that's how it's supposed to work. Like, the regulations
around how states are allowed to do this are complicated,
but the basic idea of the regulations is that if
you have a provider tax, you're supposed to redistribute money
from like non Medicaid hospitals to like Medicaid hospitals. So
it's supposed to actually improve the allocation to Medicaid. Right,
(30:51):
it can't just be a refund from Medicaid. It has
to be helpful to the hospitals that tread a lot
of Medicaid patients. States have found ways to abuse that,
but that's not even true. But like, that's the basic
idea is it's supposed to be good for the hospitals
that treat a lot of Medicaid patients.
Speaker 2 (31:07):
I just like this as an example of a tax
that hospitals or anyone else is happy to pay.
Speaker 1 (31:12):
I love it as an example of like gams and
ship right, and like I do the analogy to like
cope assistance programs, which is like drug companies. If you
have insurance to buy like traumaceuticals, and you have a
twenty percent COPE, then a drug company will be like, well,
we'll make the cost of the drug ten thousand dollars,
and then you'll have a two thousand dollars cope, and
we'll just give you the two thousand dollars cope. We'll
(31:33):
just we'll pay it for you. And then the insurance
company will pay the drug company eight thousand dollars and
the drug company will be better off than if it
had just charged to do a normal and that for
the drug. And like that's also regulated, but it's also
like a thing you can do a little bit at
the margins.
Speaker 2 (31:44):
Right.
Speaker 1 (31:45):
But the other analogy I was thinking of, and this
is like a tax that people are happy to pay
sort of is a salt tax deduction. Right, So like
historically Americans have been able to deduct their state and
local taxes on their federal taxes. So if you pay
ten thousand dollars or state taxes, that reduces your federal
income by ten thousand dollars. And in the first Trump administration,
(32:06):
I think they capped that at like ten thousand dollars.
If you make a lot of money and live in
a high tax state, you can't deduct all of your
state taxes, and people, you know immediately got to work
figuring out how to game that. And one classic effort
that I've written about is that the state could set
up a charity, right, and the charity is in the
business just like providing state programs. Right, the charity is
(32:28):
just an arm of the state, and you can make
a donation to the charity, and if you make a
donation to the charity, it's deductible from your federal taxes.
And it also reduces one for one your state taxes,
because they'll say, oh, that just counts a state taxes,
so like, it's not a state tax for federal income
tax purposes, but it reduces your state taxes. People tried
that and the irs said no, So that doesn't work.
(32:50):
But it's a good effort. But the one that I
really like is if you have business income in that
pass through a business so like most classically, if you're
a partner at a law firm, partner at law firm,
you get your share of the partnership's income just as
your personal income. Like that's normally how it works, Like
it just goes on your personal tax return and you
pay taxes on it. But states figured out that they
(33:12):
could make the state tax live at the business level.
So the business pays the state tax, the business can
deduct the state tax for federal purposes because it's a
business expense, right, and then you as a partner, get
lower federal taxes and so like, law firm partners and
like some other partners of businesses can sometimes avoid the
(33:34):
state and local tax deduction cap by like a negotiated
tax that they've worked out with their state. So like,
there's a lot of this where like state tax authorities
and people and businesses try to work out ways to
maximize their own take at the expense of the federal
tax take. And this is one of them.
Speaker 2 (33:54):
It's just another example of that that game and ship.
Speaker 1 (33:57):
As I started by saying, like this is my career
for I love I love people. Dividing up text.
Speaker 2 (34:02):
Benefits our listeners can't see. But there's a certain sparkle
in math. As he describes this, it's.
Speaker 1 (34:10):
Like a lot of tiredness in my eyes. And that
was The Money Stuff Podcast.
Speaker 2 (34:17):
I'm Matt Luvian and I'm Katie Greifeld.
Speaker 1 (34:20):
You can find my work by subscribing to The Money
Stuff newsletter on Bloomberg.
Speaker 2 (34:23):
Dot com, and you can find me on Bloomberg TV
every day on Open Interest between nine to eleven am Eastern.
Speaker 1 (34:30):
We'd love to hear from you. You can send an
email to Moneypod at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 2 (34:37):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 1 (34:42):
The Money Stuff Podcast is produced by Anna Maserakus and
Moses Onen.
Speaker 2 (34:46):
Our theme music was composed by Blake.
Speaker 1 (34:48):
Maples, Brandon Francis Nudimss our executive producer, and Stage Bauman
is Bloomberg's head of Podcasts. Thanks for listening to The
Money Stuff Podcast. We'll be back next week with more stuff.
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