MAX WIETHE: Hello, everyone. Welcome to Real Vision Live. For Real Vision, I'm Max Wiethe. I'm joined today by Carson Block, CIO of Muddy Waters Capital. Carson, thank you so much for being here with me today.
CARSON BLOCK: Oh, good to be here, Max.
MAX WIETHE: Well, it's quite a time. There's plenty of stories to discuss. I think obviously, the one that we are going to kick it off with is Archegos, but it's a little bit different. Everybody's been talking about the prime brokerage and how the forced liquidation actually happened and the effect it had on Viacom and some of the larger stocks. There was another angle here that I think is really interesting that you're the perfect person to talk to us about. Why don't we just start more broadly, what is it about the Archegos thing that is really important that maybe isn't getting the most attention from the media?
CARSON BLOCK: First, I don't think anybody really knows how to pronounce the name of that family office, so I call it Arch-Egos, which I think is a pretty fitting description of what would motivate somebody who's a multibillionaire to lever his money at least five to one. The most important thing potentially about Archegos. We don't have a way to prove this, but we suspect that actually, the book in the capital were a lot larger. We suspect that the book had originally been maybe $150 billion to $200 billion.
What's interesting is, aside from Goldman ensuring that it has an undisputed or an uninterrupted record of winning prisoner's dilemma has, aside from that the banks have been pretty good, especially if we're correct, at holding the lines and not dumping stock. We think there's still a decent amount of positions to work through number one, maybe we're wrong, but this is best information we have is that yes, that's the case. Number two, we think that this will lead to primes dialing back the leverage of their counterparties. We do think that leverage will come down in leverage in the system, long equity, long short will come down, somewhat going forward.
MAX WIETHE: Do you think that this was the only font that has been unwound, or do you think that there are probably other funds that are being unwound as we speak, but they're just not getting the same attention?
CARSON BLOCK: Hard to say, but one of our counterparties did mention, as we were chatting, Archegos, etc., that another client had made a margin call just right before that phone call with a few minutes to spare. There could be some strains that are out there among other funds. One of the funds that we're particularly interested in is Teng Yue, which is a New York based fund that's headed by Tao Li, who was an analyst at Tiger Asia under Bill Hwang, and seems to be in a lot of the things that Archegos was.
I don't know what Teng Yue's leverage was if they're as balls out as 5x or they were more restrained. Ironically, talking to one of their LPs, LP professed ignorance as to the leverage that Teng Yue runs, but yeah, that that's one that comes straight to mind here is, what's their leverage and how does this impact them? They were certainly, our information is that they were in GSX along with Archegos, so, yeah, I think that's the only one that I can really think of at this point.
MAX WIETHE: I want to talk about GSX a little bit, but before that, I want to talk about what actually triggered this margin-- some theories you have is like Marc Cohodes and Ben Hunt saying that this might have been the SEC tapping the prime brokers on the shoulder and saying, do you know what you have here? Then other people talking about the secondary offering of Viacom triggering a move in one of their major positions, and then everybody realized what they were sitting on. What do you think really set off this chain of events?
CARSON BLOCK: Well, I do think that the Viacom, Discovery drops which were precipitated by the Viacom offering, that does seem to me to be the most likely immediate catalyst for this. Now, total, total, total, total, total rumor, somebody had mentioned, I believe one person that he believed or he heard that Archegos had been short Volkswagen, which was running up earlier in the month. Now, if that's true, and look, I don't have a feeling as to whether that's true, or it could just be a garbled version of what's well known was that Tiger Asia was short Volkswagen in 2008 when Volkswagen squeezed, and a number of the tigers, the cubs were short Volkswagen at that time.
That apparently, as I understand it, that's when Bill Hwang and some of the other cubs learned the beauty of being long squeeze. If Archegos had been long, or if Archegos had, again, been short Volkswagen, which ran this in March, and then that precipitated, what happened with Discovery and Viacom dumping at the same time that a number of the Chinese names dropped as well, because of an SEC announcement in middle the week relating to the delisting process.
That would be really sweet irony, but again, the Volkswagen thing, I don't know but I think that would be funny if that turns out to be true. In any event, certainly, I feel pretty good that Viacom, Discovery, and the Chinese names that suddenly became correlated and all went down on Wednesday was the immediate trigger.
MAX WIETHE: It's funny, I was actually on the phone with a long only guy who's an emerging market manager, who, in the middle of our conversation, just sort of a catch up call. He's like, I got to go, my analyst has called me three times and some of our names are down 20%, 25% on no news, and he doesn't own GSX but he did own some of those names that became correlated. Let's talk about GSX and some of the other names that went down there. You are on the record as saying there is no fundamental reason why anyone would be long GSX, much less levered long. Why do you say that, and maybe you could give a little bit of color on what exactly GSX is, what they do, and why you would say that.
CARSON BLOCK: GSX is a company based in China. It's supposed to be online education and tutoring. It has no physical stores. We were the third, I'd say, reasonably prominent short seller to go public with the conclusion that it's a near total fraud. We found that at least 70% of the users are actually bots, probably more at least 80%, fake revenue, therefore, is likely 80% plus fake, quite possibly 90% plus fake. It's a near total fraud, and subsequent to our going public, two other research firms also went public.
The thing is that now, you've got five reasonably prominent serious research firms that have gone public with the conclusion that GSX is a substantial fraud, and all of us use different methodology to get there. That's one aspect. I've never been on the credible-- in terms of credible researchers calling a company fraud, I've never been involved in a situation that's this one-sided. The flip side of that is it's weird. Usually, when we go out and short something, especially if we call it a fraud, there's this cacophony of defenders that come back at us and say, well, when you looked at this, you got that wrong and this actually means something different. The funny thing is, I just didn't yield that with GSX.
This especially happens with Chinese companies, because a lot of Chinese retail will go get on Twitter and beat you up, or I'll get questions from Chinese media that were they're quoting like "experts" who are arguing against us, but that wasn't the case here. There was very little pushback relative. You take those two factors that I feel like the public sphere arguments were we clearly won, and there wasn't a lot of pushback, and yet the stock did this.
Why did it do that? Well, when you look at the top holders, they are these banks. Clearly, the banks aren't going long for their own accounts. They're doing this on swap. I learned that one of the funds that was behind this is Teng Yue and Teng Yue purportedly did a due diligence report. This is what they told LPs, that they did the due diligence report, 2 million dollar price tag is what I heard, and it shows the GSX is real, and it's a great company.
That was the first red flag. It is impossible to spend $2 million diligence in this, because the most that we had ever spent on a China project, and that was sending people to literally 1000s of locations, this is focused media, was half a million dollars. We didn't even spend more than half a million on Sino-Forest, which again, we sent people all over China, including to remote parts. You take a company that has no real world stores, is entirely online, and you do the analysis that we did. We had people enroll in classes, and then we were able to download the data from the classes and look at it.
There are lots of ways of skinning the cat and getting there, none of which would have cost anywhere near that. I was debating this with one of their LPs and one of the pushbacks was well, it might have been 2 million on the whole online education space, and not necessarily 2 million on GSX. Even so, okay, you spend any money on this, really, you're going to find that this thing is substantially a fraud. That's my firm belief. It is opinion, but I'm really confident of that.
If you're smart money in China, you know how to do research, you have resources, there's no way you would think this is a real company. Alright, then what was the purpose of this due diligence report? Well, it's funny when all these guys go along on swap, and they choke about 70% of the float, and you've had Mike Green on Real Vision a lot, I interviewed him on Zeros. Mike talks about how as active floats get smaller because of passive, because of holders who won't sell, you get this upward convexity of stock prices, it's not linear.
We saw that behavior with the choked float and a passive bid because it's in China indices, and also education indices. What is the reason they were long? I believe the only reason, the real reason they were long was because they saw that they could squeeze this and push it higher. I think that to the extent there's a report, I think it's a fig leaf to justify this. Because if you're sitting around and saying, yeah, we're going to go along and tie up this much float and we're going to go long-- and there was also this guy, Qian is the name, he's got a fund based in Singapore called QQQ.
He's close friends with Larry Chen, the controlling shareholder of GSX. He was even at the IPO with Larry Chen and there are photos of this. Qian looks like was selling at the money puts after the float had been largely choked. Now, that's important because the buyers of the puts were likely putting on delta hedges by going long the stock and were trying to scalp gamma. We heard from desks over the summer when this thing was squeezing that there was a large put seller at the money seller of out the money puts out of Asia, and Qian even bragged on Twitter about it.
He's since deleted those tweets, but they've been archived on a site called deloittefraud.com. You got Qian who's probably behind some real swaps there, because according to Bloomberg, this was QQQ's largest position. Some of the swaps are Qian, you've got Bill Hwang, who we think-- like I said, we think the total book was 150B, 200B even if it were much lower than that, 40B, 50B, he could have tied up a lot of the float, you have Teng Yue, Tiger Global is disclosed. Maybe that was part of the box. I don't know, but between the three guys that were in the swaps and the put selling, yeah, it ripped.
I dare any of them to look me in the eyes and tell me that they know that this is not a fraud, that they've done the work and they know it's not a fraud. I think that whether it was a fraud was just irrelevant to them, that this was all about creating a squeeze by choking the flow.
MAX WIETHE: There's so many places to go with this, but to me, it really opens up the door to like what is actually happening behind these squeezes, how much of it is really the retail army that's been attributed to and how much of it is, one, individual hedge funds acting alone and two, this sounds more like a cobble, this sounds like coordinated efforts by multiple funds using leverage, using tools that retail traders just don't have to squeeze company. Do you think that this is [?] or is GSX an isolated event?
CARSON BLOCK: Well, what I've been saying since GameStop happened, I felt that GameStop was a democratization of this tactic of creating squeezes. You look at Viacom and Discovery. Those seem like those were squeezed names as well. I don't know the names well, but it seems like that's what was going on there. Like Hwang was playing those, he seems to have an affinity for this. No, I think especially since Volkswagen happened in 2008, there's probably been some very smart money, institutional involvement in squeezes.
We see in Europe, in Europe, it's a little bit different but shareholders in a lot of cases seem to be very tight with management, and large shareholders will suddenly recall their shares when it's convenient for the company, because they're putting out positive news. This has been an institutional strategy. I think the fact that it was out there with GameStop, and somebody posted four months before the GameStop squeeze that, hey, this thing could squeeze, here's why, here's what the float really is and here's why if we were conservative in our assumptions about the delta, the call options, then if you buy a blah number of options, it should create this price increase, which would force whoever to cover.
It was just a democratization of that, but I think that when playing squeezes becomes like a real strategy that's happening on a widespread basis, it's just another symptom that the markets are not healthy, they're not performing their intended functions of allocating capital efficiently in the economy to the best users of capital. Yeah, that's my view on GameStop. Yeah, I guess the thing is I don't know if retail could pull the same trick again on GameStop and these other meme stocks, because like, you're paying attention to that, the advantage retail had in that instance was institutions weren't paying attention to read it. They were able to do this in broad daylight, just a place where the guys who were short this weren't looking and weren't aware.
Now, I think short positions, people dial back in short positions quite a bit, so I think there's much more of an appreciation for the risk that's inherent in being in a heavily shorted name, number one, and then you map that on top of what I'm going to assume is the fact that almost every smart money hedge fund just looking at Reddit constantly and would have indications of a squeeze coming. Yeah, it's funny, like some of the stuff we're short, like XL which is one of these EV SPAC scams.
Yeah, I every time I tweet, I get a bunch of people like tweeting back and be like, ah let's squeeze him squeeze is coming. It's like, thanks for letting me know, bro. The reality is that that one is much harder to squeeze because it doesn't have the float dynamics, but if we can see them coming, there's a good chance like, you're not going to get squeezed by them.
MAX WIETHE: How much is that float dynamic affecting the type of companies that you're targeting? Are you maybe finding companies that you're like, man, this in other times would be a classic candidate for us to go after, but we're just not going to touch it with a 10 foot pole because that float is dicey?
CARSON BLOCK: Yeah, that is a that is a result of the time in which we live. GSX was teaching us that. Another scam that we shorted in the fall called Nanox, which had recently IPOed in a relatively small float, that's also have been a lesson in those dynamics and GameStop just really is. If you haven't figured it out after GameStop, you're not going to figure it out. In a perfect world, we would look at the most screwed up companies, those most worthy of shorting from the perspective of where managements are being the most deceptive or misleading or outright lying.
Well, this is not the perfect world so we have to draw a Venn diagram. You've got the companies that are really deserving of being shorted, and then you've got the companies that you actually can short from a technical perspective, and here's the intersection. A lot of that intersection right now is SPACs, but it's unfortunate that there are companies that just offend us more than others from the perspective of our view of their ethics, and some of them don't make the cut from a technical perspective, so we have to move on because we do run a business.
MAX WIETHE: We got a question from Michael B., who wants to know about the SPAC space, how much fraud is in the SPAC space right now? He says RMO, CLOV and XL, are they just the tip of the iceberg, or are there significant percent of these deals based on false promises?
CARSON BLOCK: Well, I think we have to be careful here. Because when we talk about fraud, fraud is a term of legal significance. Can XL or some of these other managements be convicted of fraud? It's very hard, because I don't think they're lying about their past results. When these things go public via SPAC, they barely have past results for the most part. Lying about past results, that would be fraud. The issue is it's the forward looking statements, and just the extreme optimism that's embedded in those. Now, there are safe harbor disclaimers that are attached to every single one of those forward looking statements, and that makes it difficult to hold them liable. The reality is, unless you find the email that's a smoking gun, which they're laughing about how ridiculous their projections are, you're not going to hold them liable for fraud.
I just want to be clear that we're not accusing XL management of fraud, and I think that's probably true with most of the other exposures of these SPACs. Now, we think, from a legal perspective, not fraudulent, intellectually fraudulent as fuck. I think this is the tip of the iceberg. Not to say that every single SPAC is intellectually fraudulent, and a sick joke, but the reality is, you had all of these SPAC IPOs last year because of a flood of retail, unsophisticated retail that came into the market, and then the de-SPAC-ing transactions that ensued as well, especially in things that sound sexy like EV.
That, to me, is just a very cynical, predatory play on unsophisticated retail. Now, again, that's not to say every single one of these things is intellectually fraudulent and is going to be a bagel in the not too