Transcript: Woo. A question each of us should be asking ourselves? Well, are you . . . Are you riding in the ox cart or are you pulling the ox cart? Are you riding in it, or are you just criticizing the people who are trying to pull it?

Recorded on: 10/29/07

Transcript: I’d probably want to interview Jeffrey Sachs. I’d probably want to . . . When I . . . What I would wanna ask him is what he is proposing is . . . seems so clearly wrong to many other sensible people in his field that . . . and it’s . . . It certainly is divorced from my own experience. It seems to be ideas that have been tried and proven to be pernicious. What is he thinking of? Now I know that would be a loaded question and he would have to find a nice way to answer it; but he won’t answer . . . To me if we really think of international development as one of the major issues that the world faces, I’d wanna know what his . . . his . . . what can he be . . . I really wanna say what can he possibly be thinking of? But maybe there’s something in there that I’m missing.

And the other one I would ask is . . . of Ahmadinejad or somebody from Iran, what is their solution on Israel? It’s a non-starter to say we’re gonna wipe ‘em into the sea. We’re gonna nuke ‘em and stuff. What is their solution? What is their proposal – a serious proposal? And if they don’t have one, you know, I . . . I would try to find that out.

Recorded on: 10/29/07

Transcript: First of all U.S. education. Education, we’re . . . we’re spending about four . . . or no. We’re spending about eight or nine percent of GDP and education, but I would give it to where . . . some of it towards educating disadvantaged people. We’re creating . . . We have created a class of undereducated people that it’s . . . We’ve given them a death sentence. I would probably put $40 billion into a Manhattan project of alternative energy. Don’t know if it’s fusion. Don’t . . . not . . . don’t know if it’s, you know, sun. I have . . . I have . . . ___________, geothermal. Not sure wind is ever gonna get us where we think it’s gonna get us, but alternative energy. And then in the developing world, although there’s a lot of evidence that you can’t get rid of poverty by giving money away, lots of it ____________ pretty overwhelming evidence, you can get . . . there’s . . . There were some studies done where you . . . They would go into an Indian village, and you take the output variable to be the weight of children and a family. That’s a very good way to measure the well-being of a family – specifically increases in children’s weight. Well if you give money to men, you don’t get any increase in the weight of children. You get increase in their consumption of alcohol, tobacco and (01:02:14) hookers. You give money to women, you immediately see this dramatic increase in the weight of children. So I think that there’s . . . I’m really cynical about large . . . To be honest I’m cynical about Jeffery Sachs and Bono and that whole . . . that whole approach. I mean to me they’re just trying stuff that was tried 40 years ago. It didn’t work then. It’s not gonna work now.

Recorded on: 10/29/07

Transcript: I think we’re eating . . . Collectively, I think we’re eating the seed grain. We’re farmers who are so, you know . . . The image comes to mind when I read about the hedge fund community of Henry VIII, you know, in the movies where he’s got drumstick . . . turkey drumsticks and he’s just __________ slobbering. That to me might be how we’re remembered. I mean we are so short-sighted. We’re environmentally ruining the planet. To me, I think what’s happened is there was some pretty good safeguards that kept . . . Well I think what politics really was from . . . especially from the ‘30s and ‘40s, was once government got in the business of . . . of allocation, allocation, allocation, what happened was people realized it was very profitable to go and capture D.C. and get them to allocate wealth and resources to you. Well we all figured out that game by the 1980s or so, and different groups stopped being able to organize in order to expropriate largess from the public treasury. And so what happened was we all realized there’s one group that we can still stick it to, and that . . . because there’s one group that doesn’t vote, and that’s the future. And so basically our programs now are . . . are . . . Our lifestyle, our rap now is all about sticking it to the future and living better now. And that shows up whether you’re talking about Social Security, or education, or you know, fiscal discipline, anything. It’s basically politics . . . The normal push me, pull you of political life of much of the 20th century has disappeared because we really . . . we all realized, hey, that there’s one group that we can stick it . . . to stick them with the bill, and that’s the future.

Recorded on: 10/29/07

Question: This age? I think it will be a ___________. Well I think that this has persisted and gotten as bad as it is only because of different kinds of capture. And there’s powerful, you know, structures of power and authority as __________ would say; although I think he . . . But I’m a believer that there are classes with . . . and groups who have captured the mechanisms of government; and maybe more importantly, captured the methods of discourse – of popular discourse. What’s great about social media is it bypasses that. It bypasses all these central . . . centralized hierarchical systems of power and authority. If there’s a chance to get to work our way out of it, it’s through social media and the Internet.

Recorded on: 10/29/07

Transcript: I used to ask . . . I’ve asked Milton Freedman actually that same question, and he . . . he always said that I was lucky in that I was just a born optimist. No matter how bad things got; no matter how statist the intellectual class became in the ‘40s, and the ‘50s, and ‘60s, I was always an optimist. I always . . . I knew the books weren’t going to be burned. I thought that we would come out of it. I guess I’m not so . . . I don’t . . . I can’t be as optimistic as he was. I’ve become in the last two or three years, as I’ve discovered that the system is just turtles all the way down, I don’t think that we’re gonna be able . . . Well I think it’s a 50-50 thing whether we’re going to be able to fashion the responses that we need to deal with the largest problems we face.

Recorded on: 10/29/07

Transcript: There’s the environment, and I think that I can summarize it quickly. When in doubt, err on the side of the planet. There’s still some scientific question . . . I don’t think there’s any scientific question about global warming. There’s some scientific question about man’s contribution to global warming and how much is generated by us. I think that that uncertainty has created too much political indecision. When in doubt, err on the side of the planet. It may be too late. In fact the . . . the . . . Who’s the British fellow who founded the _________ hypothesis? James Lovelock or something? He believes it’s too late. If we have a chance, it would be a radical shift in our energy consumption – either radical reduction . . . We can’t . . . I’m a big fan of alternative energy. I don’t think we can get there fast enough. We probably . . . (52:34) I’m a pro new environmentalist. I think if we have any chance, it would be through a rapid development of nuclear power; but . . . and I think politically that’s not gonna happen because of the United States ___________ syndrome. So I’m not . . . I think that one of the two big international issues is the environment. And I’m not happy about our chances in really winning that in the next 50 years. And by then it’ll be too late if it’s not now.

And then the other is the Middle East. I think that the rest of the world pretty much plays by a set of rules that everybody knows. It’s a little bit like in corporate law, there’s a court in Delaware called the Court of Chancellery or something. And everybody already knows how it decides. It’s got this very stable system, and that means that law suits rarely have to go all the way in Delaware because it’s so predictable. Everybody knows how it’s gonna be decided, and so they save themselves all those transaction costs. And in interna . . . In international competition, that’s basically the case throughout the world other than the Middle East. And the Middle East is such a . . . is such a . . . Well I’ll put it this way. I really think that there’s three groups that are . . . that matter in the Middle East. And it’s not . . . religion . . . I don’t see the Middle East conflict as a religious conflict. If you’re gonna get kids to blow themselves with dynamite, you need a beer jingle. And the beer jingle can be . . . there’s different jingles for the different kids. But the real issue in the Middle East is there’s crooks and there’s fanatics. And there’s a small number of moderates. And we back the crooks ‘cause we’re trying . . . We the United States back the crooks because we’re trying to get them . . . we think they’re fighting the fanatics for us. In fact, we don’t understand that the crooks and the fanatics have a relationship of “I’ll scratch your back if you’ll scratch mine”. In the process we’re overlooking the small – but it exists – the small moderate class. And if there’s any hope in the Middle East, it would be finding them, and working with them, and sort of building civil society around them. But don’t hold your breath.

Recorded on: 10/29/07

Transcript: And domestic I’d say the only one that really matters to me is education. I think that the left and the right get hung up on a lot of silly things. You know what’s really going on, an economist __________ good trade to the marginal utility in the market. And that really goes for human skill sets as well. If one kid leaves high school at 18 with this set of human skills, and one kid leaves high school with this set of human skills, their life prospects . . . or doesn’t leave high school . . . their life prospects are defined. And 99 percent of the time it’s going to work out just as you would imagine. And it seems to me that the left and the right get hung up about all these downstream effects. But if you really care about social injustice and inequality, racial inequality, income inequality, that’s all a downstream effect. If you can’t fix this, we’re just re-arranging deck chairs in the Titanic. But if we could fix this stuff, I think that . . . that in the space of a generation, a lot of problems would wash through that had been troubling America since our birth. And I think the only way to do that is through freedom, is through creating a competition, and a market, and education. __________ higher education. We have . . . Our university system is the envy of the world. Well that’s because people choose. People choose where to go. They get vouchers. The vouchers are called Pell Grants or they’re called the GI Bill or something. But there’s a lot of choice, a lot of vouchers, a lot of competition. And the result is a system that’s the envy of the world. Our K through12 system is a disaster. We have . . . By fourth grade we’re still okay. By eighth grade it’s deteriorating. By the time our kids are 15, 16, we’re 25th out of 30 countries . . . we’re down . . . 30 ________ countries. That’s a calamity. There’s no reason . . . America is used to thinking of itself as sort of . . . if you’re in my generation, you know you just think it just has this role in the world. Well it didn’t always have that role in the world, and there’s nothing that says we need to. We had a . . . Basically all our competitors were destroyed by World War II. One industrial country was left after World War II _________, too – the United States and Sweden. So essentially the whole competitor class was destroyed. We ran the table for two generations, but the rest of the world has built themselves back. And we’re sitting fat, dumb and happy, and we’ve slipped to 25th now for high school seniors out of 30 __________ countries. Well that tells . . . that tells me where our standard of living is going to be in 25 years. It’s . . . And you know one generation is not a long time. In 1975, South Korea had half the GDP per capita as Mexico did. By one generation later, it had three times. South Korea had three times. So it had a six-fold differential in one generation. The same thing is gonna happen to the United States unless we get it together.

Recorded on: 10/29/07

Transcript: I sound awfully cynical. I think that humankind has been a history of boots – of powerful people stamping on people’s faces. I think that’s history. And there’s different sized boots, and different brands, and colors and such. But that’s basically history. Then the enlightenment comes along, and the enlightenment says . . . And you know it’s interesting if you read something like Machiavelli, whose . . . ___________ thoughts about Machiavelli. But you even have to understand that when they use the word “freedom”, they use it differently than we do. For them, a state was free in the sense of it was not a __________ state. The prince was not a _________ to some greater empire. It was just taken for granted though that, of course, the people existed as instruments of the leader’s end. And then this great watershed moment in humanity is the enlightenment – especially the Scottish enlightenment where people started realizing, wait, we have our own ends. We exist as ends in ourselves. And the state is just this compact we formed so we can pursue our own ends. Now of course the control freaks among us hated that and fought the enlightenment. Then when they couldn’t defeat it, they subverted it, and that’s the French enlightenment. That’s Rousseau. And they couldn’t actually stop the progress of the enlightenment, so they . . . what they did was they cheapened it. They said, “Yes, you’re right. This individual freedom is important; but we have to understand that individual freedom – it isn’t this silly, Scottish, English sense of a man deciding his own ends. It’s really this deeper sense of subjugating yourself to the right historical mission.” So you get Rousseau with his “_________ General” – the will of the . . . the general will, which maybe isn’t . . . It doesn’t mean the majority will. It’s maybe something that only one person knows. And when this Robespierre forces you to submit to him, he’s “forcing you to be free”, in Rousseau’s phrase. And that goes on through Hagel and Marks where the . . . you know it’s the _________. And it’s Lennon where it’s the vanguard _________ party; Hitler, where it’s the ___________. It’s the prerogative of . . . It’s the people . . . Real freedom is frowned, and subordinating yourself to the work of the people __________, as they said over in the concentration camp gates. And somewhere along the way, the intellectuals from the continent, I think, lost this sense of no freedom as this basic idea of people choosing their own ends in life. And it’s not . . . it’s . . . it’s a . . . it’s a . . . When I listen to people talk in politics, I go right back to this route. And it’s pretty easy to see that for most of them, they’ve just taken the wrong fork. They are, in one way or another, defining liberty and freedom as subordinating yourself to the ends that they . . . that someone else has chosen for you. And that . . . that’s valueless. So those . . . That is, to me, the main contention in the world of ideas and political thought. Does somebody get that freedom has to be a self-defined process in pursuit? Or is it . . . Are they all debating freedom as, well, we take it for granted that we get to subordinate individuals to our ends, and now we’re just going to debate the ends. That’s where most people are. That’s where most of the world is. And I think that’s a really pernicious concept. In fact Voltaire read a book by Rousseau where he . . . where when he read this stuff, he wrote Rousseau a letter where he said, “Dear Monsieur Rousseau, I’ve had the pleasure of reading your book against the human race.” Well he had it exactly right. This philosophy . . . this continental philosophy from Rousseau, Kant, Hagel, Meecha, you know, Marks, Lennon, of course – it’s anti-freedom. It’s . . . it’s philosophy against the human race.

Recorded on: 10/29/07

Transcript: I’m not . . . ’m not sure that there is a meaning. I really am not. But if there is a meaning, it’s gonna be found in . . . in the service you provided. Did you move the ox cart of civilization along a couple of feet? Or did you just rest in the back? Or did you just ride in the ox cart? You wanna be . . . you don’t wanna be riding in the . . . A lot of people riding in the ox cart and they wanna, you know . . . they wanna whip the people who are trying to pull it, and they wanna tell them all the things they’re doing wrong. And they wanna tell ‘em how much better they could pull if they were doing it. But they’re riding in the ox cart, and you definitely want to be one of the guys pulling it, or at least putting your shoulder to the wheel, if anything.

Recorded on: 10/29/07

Transcript: It’s hard to outgrow a heavy Catholic upbringing. I certainly had that. I was an altar boy and left when I was about 13 or 14 and became interested in Asian philosophy. My sense of how the world works is very Daoist, which is to say Daoism . . . Daoism became _________, which in Japan is pronounced “___________”. So it’s my, I guess, a Zen sense of how the world works. My sense of my obligations in the world probably come from that . . . that Catholic upbringing. So I’d say if I had a personal philosophy, it would be those . . . those two.

I have no disrespect for organized religion, but to me it’s a handrail. And it’s a handrail to help you get somewhere. I mean the idea is . . . The goal is getting . . . Well it’s not even a goal; but there’s that place and those handrails, and it’s easy to confuse the two. I’d say only in the sense of . . . I’m not sure that anything has any meaning. I’m not sure that 50 million years from now, anything we’ve done means anything more than what some ants are crawling around on a rock mean anything more than they have. But if there is meaning, that meaning is to be found in service. It’s in the way you live your life and the . . . and the real service you provided other people. But I’m not even sure that . . . I’m not sure that makes the grade. We may all just end up __________ some ants crawling around on a rock in space.

Recorded on: 10/29/07

Question: Who are today’s business leaders?

Transcript: I think Buffet and Munger. And you know Munger doesn’t get enough . . . Munger has great things to teach. Buffet is, of course . . . Buffet is first and there is no second, really. Buffet is . . . isn’t just a businessman. He’s a guy who figured out the way the world works and yet he capitalized on it. But his great business success is a demonstration of a philosophy that he developed or was taught . . . or actually was taught and then he took farther. So I think really Buffet is the great . . . is the great business teacher. And he would say Munger is his philosopher and his private philosopher who taught him a bunch of things. But there were . . . They come at things from actually quite different angles. But Buffet and Munger.

Question: What does Warren Buffet teach you?

Transcript: In business it’s this. And I remember him telling me something when I was 13, and him saying, “Look you . . . I’m gonna tell you something that you ought to get in five minutes or you won’t ever get in all your life.” I was all eager, ready to learn some formula, and he says, “Look. You buy a share of stock if and only if you would buy it even if the market were shutting down for 10 years tomorrow. Would you still buy that share of stock?” And by running it through that mental filter, you stop thinking of it as this piece of paper that you’re trying to buy at an uptick. And you think of it as a slice of a company. You’re getting a slice all the way through the company. And is that a slice . . . Would you want to own a chunk of that company for the next 10 years? So that goes for both stock investing; but also when you run a company, you run it as if there was no public market. You don’t worry about the public market. You focus on building the real intrinsic value, and that value should get expressed over time.

Recorded on: 10/29/07

Transcript: What inspires me? Education. I think if there is a chance – if we have a shot as a republic, it’s going to be in the education system. We blew it as a generation and the generation before us. We blew it. But if we can get the education fixed . . . system fixed, we might be able to come out of it.

I mean my mom was always saying, “You stand up for what’s right with the whole world practically . . . stand for what’s right.” And the truth is most of the time the world falls on you and it crushes you. But once in a while you stand up and it falls on you and you can crack the world. And it’s all not going to matter in 50 million years. The only thing that’s going to not have faded is the form with which you live your life. So that advice . . . I mean sometimes I’m accused of being an extremist. But to me it’s almost an experiment to see what happens if you just stand up and you don’t budge for . . . And by the way there is no intellectual debate anymore about my claims on Wall Street. That whole . . . All these things have come true. The whole intellectual debate’s over. There’s conferences on Wall Street now, where a year ago when people tried to talk about this, it was academics and Wall Street guys shouting at each other. They just had the same _________ conference a few weeks ago, and that whole debate is over. Everybody gets that we’re right, that we’re right on the facts. The debate is how do you change the regulations. But the whole intellectual debate’s been won. In fact one reporter from a major news wire who is friendly to me wrote me, and I said, “When is that story gonna come about . . .?” Oh we had 1,000 stories about how crazy this guy was. And where’s the story? Well all these things have turned out to be pretty much right. And she wrote back and said, “You . . . Don’t expect it. People know it, but people aren’t gonna write that story.”

Recorded on: 10/29/07

Transcript: Well my view has evolved in the last few years, and that is there’s a . . . there’s a concept that economics calls a “regulatory capture”. A regulatory capture is . . . is when you . . . When an industry gets . . . gets regulated by somebody, but . . . For example, this happened famously with the Interstate Commerce Commission. And the ICC folks found out that if they regulated the railroads – this is in the 1870s and ‘80s – that if they regulated the railroads by restricting new entrants, and setting prices artificially high so all the people in the industry made a lot of money, then after you spent 10, 20 years at the regulator, you could leave, and there would be very high paying consultantships or directorships waiting for you. And so the regulator gets captured. They’re supposed to be protecting the society from this industry, and it becomes a tool of that industry. Well the SCC is a captured regulator. That . . . but and you know you start seeing a lot of things in terms of regulatory capture. And by the way, I think there are some good people at the SCC. I’ve fortunately met a couple of them. But I . . . In general, you know, I don’t think it’s monolithic. I think the guys at the top are pretty good. And I think the guys at the grassroots level are good. But in between there’s a lot of captured regulators. Well there’s a law professor at Harvard named John Hansen who has written a paper a few years ago and uses the concept of deep capture. And it says what if our system . . . What if it isn’t just this regulator who’s captured, or that regulator, or this congressman; but maybe it’s the whole thing. It’s . . . Maybe it’s the regulators, it’s the congressional oversight, it’s the press, it’s the university system. If the whole thing were captured by some malevolent force or group, how would we know? Well I think . . . In fact my blog is now called “Deep Capture”. I think that we have been captured. I think that it starts with the . . . I think a group of powerful, super wealthy hedge fund folks have captured the SCC and Wall Street in General; have captured the SCC; have captured the senators who were supposed to be overseeing the SCC; have captured the hedge fund beat, the financial reporters. Bertrand Russell was once famously in a discussion with a Hindu philosopher who was talking about the . . . the you know . . . who took the position that the world rides on the back of a turtle. And Russell said, “What’s the turtle ride on?” And the Hindu said, “Well the back of another turtle.” And Russell said, “Well what’s that turtle ride on?” And the Hindu guy said, “Sorry professor. It’s turtles all the way down.” Well this experiment of mine in the last two and a half years was really ________ the bottom. I thought that I was gonna come forward and make these charges, and the SCC was gonna intervene and look into it. No. SCC is just turned out to be . . . And I was warned these people are extraordinarily vindictive. “They’ll come after you,” which they did. The senators who oversee the SCC, same thing. They refused, and refused, and refused to look into this issue, lied . . . There’s thousands of letters that have been written to a Senator Shelby. Shelby’s on TV saying, “Oh, I never heard about this. It’s a flat lie.” In fact somebody posted a thousand of these letters on . . . on the Internet. The financial press . . . Again, it’s just like in the Watergate era, or right before the Watergate era, the D.C. press came to the White House. For the 1960s, the press were really poker playing buddies and such of Johnson, and Kennedy, and so forth. So they . . . It really . . . it took a couple of cub reporters to actually come along and report on what everybody knew. Well I think the same thing is happening with the Wall Street beat and the financial press. You have a group of reporters who were very, very chummy with these folks they’re reporting on, and they’re not even reporters. _____ is basically marketing literature for about five hedge funds. And they’re hedge funds that barely get named. They hardly ever get named, but they’re supplying the stories that Baron’s reports on. So the whole system has been captured, and I guess my contribution, if there be one, is going to be you know . . . It’s funny. When I started this off I wasn’t a Republican; but I was a pretty square conventional guy. And now I’m a radical. Now I’m just burn it all down. Maybe it gets replaced by something better. This whole system is captured.

Recorded on: 10/29/07

Transcript: What’s naked short selling? There’s been a myth in the marketplace for 10 or 15 years that there’s a crime going on that’s very difficult to understand. It’s arcane. You have to know a lot of jargon to understand it; but it’s as if the savings of America are in a big fish tank, and some people have figured out how to open a ___________ and just drain it out and nobody up on top can see this is happening. Well it sounds lunatic, and I didn’t believe it. I heard it . . . Some version of that has been floating around the market since the early ‘90s. I didn’t pay it any attention. So people started getting in touch with me about three years ago and asking me to . . . talk to me about it, and telling me to look into and stuff. And I’m saying . . . I dismissed them all. And what eventually happened was one guy got through, and I put him on the speakerphone as I was packing up a suitcase. I’ll never forget. And he described this very arcane thing for about 45 minutes. And at the end of it I was saying, “Fine buddy. I understand, and thanks a lot.” And he could tell I was giving him the brush off. And he said, “Look, I can tell you’re giving me the brush off, so I’m going to give you a series of predictions. And when these come true, you call me. And the predictions are here’s a set of five journalists that are going to call you. And they’re gonna call you and do hatchet jobs on you.” None of them had ever called me before. Secondly, “So you’re going to get these calls Patrick, and you’re gonna find yourself the target of a federal investigation. You’re going to find yourself trading on some foreign exchanges that you never heard of that . . . you know, Bahamas and Australia and stuff. And fourth, the SCC is going to start publishing a list of companies that are seeing a certain oddity occur in their stock. It’s called the Regulation Show of Threshold List. And when they start publishing that in a couple of months, there’s only . . . half of one percent of companies are gonna be on it, but you’re gonna be on it.” And I said, “Okay buddy. Okay, okay, okay. Thanks.” Hung up. Well over the next eight weeks, every one of those stories came true. In fact on that trip that I was packing for, the journalists started calling me. Well that was odd. And you know the power of any . . . The journalists called me. We . . . we became the object of an FTC investigation that was sort of a very flimsy investigation that went nowhere and they dropped it. We started trading on exchanges in Stuttgart and very . . . Munich, Bahamas having nothing to do with that. And when this list came out of . . . and there were only 30 or 40 companies out of 7,000. When the list came out we were on the list. Well the power of any theory is its ability to make predictions. And if someone could make that sort of prediction, you gotta look into it. So I started looking into it. And I spent about three months and buried in it, and I gradually realized the guy was right. There is this crack in the financial system, and the savings of Americans are being drained out of that crack. There is one economist who says . . . excuse me, I mean a __________ economist who says it may be tens of billions. It may be hundreds of billions dollars that have been stolen through this crack. Now what is the crack? A normal stock trade is you’re buying stock from me, you give me money and I’ll give you stock. That’s called settlement. Believe it or not there’s a loophole that exists in the system. And when the time comes for me to give you the stock that you bought from me, I can give you just an IOU basically for some stock. Now you or I couldn’t do this, but big hedge funds and prime brokers have ways of doing this. And all they’re really giving is an IOU and you never know that. You get your brokered statement from Merrill Lynch or Morgan Stanley, and it says you got the stock. Well no stock ever came. All you got was an IOU. It happens . . . it happens only about one or two percent of the time, but . . . And the loophole was probably created for some good reasons – that you want . . . If somebody signs the wrong piece of paper, or somebody’s dog eats their certificate, you want them to be able to say . . . You don’t want the system to freeze. But what happened and what seems to have happened is some hedge funds have figured out how to manipulate this loophole and inject hundreds of millions or even billions of these what are, in effect, fake shares into the market. Now it creates three effects. There’s three problems – a small, medium and a large problem.

It creates a small, medium and a large problem. The small problem is it’s ruined corporate democracy. And there was an article by Bob Drummond in Bloomberg Markets magazine mid-last year that’s called “The Corporate Voting Charade”. Well here is people on the record in the back offices of Wall Street – the transfer agents who actually count votes – that say . . . with quotes like, “This is positively criminal. We regularly do not have any idea who’s entitled to vote and who isn’t. We regularly get two to three times as many votes as there are shares.” Now as crazed as all that sounds, the New York Stock Exchange did a study on 341 elections – found over voting in all 341. Why this is a problem is after WorldCom and Enron and such, the American government solution was to these corporate scandals of the early, you know, 2000, 2001, 2002 . . . was to tighten up corporate governance. Well corporate governance in the Boards of Directors that’s based on corporate elections, which is built demonstrably on quicksand. The whole system is broken, and you can look this article up. And it’s even . . . The SCC just two Tuesdays ago came out and basically said fixing this problem is gonna be our work in 2008. It had a market regulation. __________ said that. So that’s the small problem. Everything I just described is the small problem. That’s a complete hoax. Corporate democracy is not a hoax because of this over voting problem. If you have two . . . If you have all these fake shares in the system, and people voting the fake shares, and they all come in, there aren’t any . . . Believe it or not there aren’t even any rules, and it . . . on which votes get thrown out and which don’t. So that . . . that whole system is a _________, and that’s the smallest of the three problems.

The mid-sized problem is you can destroy companies using this technique. If you . . . If it just really happened by random human . . . human error . . . You see these fake shares, these phantom shares scattered around the market. Like peanut butter spread over a sandwich, they’d be spread. The SCC hired an economist named Leslie _________ to study this, and she came, she did the statistical analysis and saw where they’re concentrated. And she said no way this is happening by random human error. This is . . . it’s . . . it’s massive. It’s endemic in the system, and it’s clearly being used to manipulate. It’s clearly being targeted. And how it is targeted . . . how it is used to manipulate is you go after a small company – a small cat, meaning 300 million, 400 million or less. You . . . you pick a biotech, or a financial company, or just a technology company where it’s easy to create a lot of misdirection and smoke and mirrors. You couldn’t do . . . What I’m about to describe, you couldn’t do to IBM or Microsoft. You can do it to small companies. And you just flood the market with fake shares in their companies and you can crack the market. And if you can do this while you have a couple of your ___________ journalists just write stories after stories banging the company, you can basically drop it to nothing. And if it’s a company like a biotech, the biotech model in America has always been, you know, angel funding, small venture rounds, a couple of venture rounds. It goes public and then it sits at the capital market for five, 10, 15 years as it develops drugs. Well you can snap that life cycle . . . The company will collapse and you can walk out with this market cap. And maybe you can mark out . . . walk out with that market cap two or three times over. So is that going on? Well three years ago the SCC was saying, “This is a myth. This isn’t a myth.” They finally faced enough public pressure that they had to . . . they did . . . they passed a very tepid regulation, regulation show. And it . . . it said that they were gonna start disclosing the names of companies that see . . . that are seeing these excessive numbers and these phantom shares in their stock. And they actually said on their web site . . . The SCC web site actually said we have to grandfather . . . In other words, we have to forgive all of the phantom shares that are already in the system because we’re afraid of the volatility that might result from large, pre-existing, open positions. Now that’s bizarre because a month or a year earlier, they had been saying there are no . . . This isn’t going on. It’s a myth. It’s a myth. It’s all wacky. And then they came out and said, “Well okay. We’re gonna try to do something about it; but we have to forgive all that’s in the system, because if we don’t it’s gonna crack the system.” See I’ve been down this rabbit hole so long it’s hard for me to tell what normal people see. Do you see why that’s contradictory?

Recorded on: 10/29/07

Transcript: Interesting. Well there’s two ways to explain it, and the part that’s the most interesting is I knew a guy when I was in high school – a guy named Charlie, a good fellow, Chaluca – and whatever you wanted . . . He was part of sort of the Greek mob I would say that runs a lot of things in the D.C. area. And whatever you wanted, he’d say, “Yeah, yeah. I know a guy in a warehouse. I’ll get it for you real cheap. I know a guy. I’ve got a cousin in the factory,” or something like that. We all wondered if it was hot or something. Well it just turns out that Chaluca knew people, and he did know . . . And it turns out that at the fringes of retail, there’s this world of folks that folks like you and I normally never meet. They’re called “joppers”, and they tend to be “bada-bing, bada-boom, knows-a-guy-that-knows-a-guy” kind of fellows. And I learned about that world originally through him. And then as the idea for Overstock was let’s just . . . For the consumers who don’t have a friend like Charlie, we’ll be a company of Charlies. We’ll be out there wheeling and dealing trying to find these special opportunities, bringing them into a warehouse in Salt Lake, putting them up online. So we’re . . . we’re for the consumer who doesn’t have his own Charlie. They just need to know us. That was sort of . . . That was one way to explain it. I did find that interesting. I didn’t think I was . . . I thought I’d be doing it for about six months until I found someone to replace myself, but that . . . It’s like the God . . . Al Pacino in Godfather III. “Every time I start to get out they suck you back in!”

Recorded on: 10/29/07

Transcript: Well I think of my role very much as being like a teacher, like a professor. I used to be an academic, and I’m not. It could be that I just interpret my current role that way, but you really can’t get very far just being the boss like from the Jetsons cartoon and, you know . . . Spacely Sprockets, shouting at people and giving them orders and stuff. It’s really a question of how quickly can you teach them and how quickly can they learn. And stepping back and giving people a lot of room to grow . . . In fact that’s, say, the difference between, in my view, middle management and upper management, is a middle manager is suffocating to his people. He may get a lot done, but he’s suffocating. And sometimes you have to accept a tradeoff that you’re going to be less suffocating and things might not be done as well or as quickly; but more people will learn. And the idea is to build a learning organization. I think of it almost as being like a college president, and we’re trying to build a learning organization. And there are times when I step in and . . . times when I step in to screw things up, and times when I step in and make things marginally better. I hope a few more of the latter than the former. But it’s really not about giving orders so much as creating the environment and the people who are gonna be able to carry on.

Recorded on: 10/29/07

Transcript: Well boy I learned a lot. I learned a lot from martial arts. I was . . . I’m the youngest of three sons, and both my brothers are bigger than I am. I grew up regularly having my ass whipped. And so the only sports I ever wanted to do were learning to defend myself – wrestling, judo, boxing, jujitsu, karate. Boy you learn a lot of things. First . . . And besides all the disciplines and techniques and such, you learn that size doesn’t matter. It’s often . . . There’s pressure points, there’s vulnerabilities that somebody has that you have to identify. And you have to identify where your own are and really devote your resources so to speak to protecting yourself there. I also . . . I’ll tell you a great boxing story. Did you ever . . . ever hear of the Poppy Rollins story?

When I was trying to make it as a boxer, my . . . I was going to be the Great White Dope. I lived out in New Jersey and trained hard, and I . . . I boxed as a teenager, but later in my late 20s I decided I was gonna be a world heavyweight champ. Now I gave it a good shot, got beat up a lot. But the whole time I was trying I was hearing about this guy, this manager, who they used to tell me about named Poppy Rollins. And Poppy Rollins, “He’s a holy terror, Patrick. Oh gosh, you’ll never see this guy as . . . This guy from Puerto Rico. He’s a holy terror.” And he had this incredible knockout record and such. I kept hearing about Poppy Rollins. Well when I . . . when I got beat up the last time and decided I’d had enough – I wasn’t . . . there were easier ways to make a living – I went . . . I was throwing . . . hanging up my gloves. And my coach, this guy called me, Mr. Anton, the last day. And he said, “Hey! Poppy Rollins is fighting in Philadelphia tonight. Let’s go see him.” I said okay, so we drove down and we get there, and the . . . I’ll never forget the . . . The two fighters go into the ring and they take off their robes, and one is a tough looking . . . was a miniature Mr. T – arms like cannon balls – just tough, tough guy. And the other guy was this skinny, light-skinned fellow. A bit of a . . . a bit of a gut, just clearly not in shape or anything. And this other guy . . . It just looked like he was gonna kill him. And I said, “My god. He looks . . . You’re right. He does look like a killer.” And Mr. Anton said, “That’s not Poppy Rollins. That’s Poppy Rollins.” And I said, “Come on. That’s this guy . . . that’s this holy . . .”

“Oh my gosh Patrick. He’s a holy terror! Wait ‘til . . . he’s a holy terror.” And I’m like, “Yeah, yeah right.” Well the fight lasted about two minutes, and Poppy Rollins just destroyed this other guy. And so that . . . that was interesting. But what was more interesting was that they left, and it turns out that the father was in the audience. He was actually in the ring. And as they left . . . and the kid won. He won by a knockout in the first round. And as they were leaving the ring, somebody . . . a group of guys were standing there – big guys – and Poppy Rollins’ dad was a little guy as I remember, a little Puerto Rican fellow. And somebody said something like, “Your son’s a bum,” and this guy without even hesitating, without even confronting him just grabbed a chair and smashed it. And it just turned into this rumble. And I got a . . . I got a . . . I got a good idea of what had made Poppy Rollins as tough as he was. So anyway I stick that . . . There are times when my pop has been a little hard on me too, and I think of Poppy Rollins’ dad. And you know you gotta . . . I know what made . . . Poppy Rollins was tough, but I also know what made him that tough.

Recorded on: 10/29/07

Transcript: Patrick M. Byrne. Where am I from? Well I currently live Utah, but I’m actually from back east. I was born in Indiana, grew up around New England. I think of Vermont and New Hampshire as my home, but I spent my teenage years in . . . just outside of Washington, D.C.

Well I’m sure the New England upbringing gave me a traditional set of values and sort of Yankee values. I had . . . The time in D.C. really gave me a lot of exposure, I think, much more than I had growing up in Vermont and such – in New Hampshire and Connecticut – to the way things work. And . . . that’s kind of a vague answer. How did it shape me? I’d say actually where I came from, if I were to . . . If you want me to take a running start at it, I’d say I come from a family that’s Irish, middle class or lower middle income Irish immigrants from Long Island and New Jersey – Patterson, New Jersey and down to the southern tip of New Jersey. I think my pop was the first guy not only in his family but in his high school to go to college. He went on to the . . . went on to the GI . . . into the Air Force, but the GI Bill to graduate school in Michigan. And then I was born in Indiana, and I’d say that I know people . . . Well I’d say that my family really lived the Horatio Alger dream, because when I was born he was just off the GI Bill and on his first job. And then by the time I was 16 or 17, he had become . . . or our family had become affluent. So it was unusual in that I . . . I experienced as I was growing up . . . I think my worldview was formed when we were probably still, you know, lower middle income or middle income. And by the time I became 16, 17, 18 we were affluent. So I think sometimes my particular take on things was somewhat formulated by that experience. I was also extraordinarily lucky in that along the way, this funny guy started showing up at our house – this funny guy from Omaha whom nobody had ever heard of at the time . . . And he would show up, and visit us, and sit and talk with me for hours on end. So where I came from, if I . . . I’m probably blending a couple of answers together, but that’s where I . . . I think my . . . I came from in a socio-economic sense.

Recorded on: 10/29/07