Overstock.com CEO and chairman Patrick Byrne. Photo: Joe Pugliese/WIRED
Patrick Byrne says the zombie apocalypse is coming, and there’s one thing that can save us: bitcoin.
He tells me this during a phone call from his car, a black Tesla
Model S that’s winding its way through the mountains above Salt Lake
City, on its way to Byrne’s home in the Utah ski country. Byrne is the
CEO and chairman of Salt Lake’s
Overstock.com,
one of the world’s largest online retailers with more than $1.3 billion
a year in sales, and he’s about to place an enormous bet on bitcoin,
the digital currency that exists only on the internet.
In the estimation of many leading economists, bitcoin is a fatally
flawed idea shaped by people who don’t really understand how money
works. But Byrne is an unorthodox thinker, a three-time cancer survivor
with a PhD in philosophy who’s never been afraid to fight for what the
rest of the world sees as complete madness. Though he runs a company
that’s publicly traded on Wall Street, he spent much of the last decade
accusing Wall Street’s biggest brokers of widespread corruption — not to
mention Wall Street hedge funds, analysts, reporters, and government
regulators — arguing in the most grandiloquent terms that their greed
would eventually bring the country crashing down. It’s no surprise that
his maverick career would collide with the equally iconoclastic bitcoin.
It’s as if his whole life has been leading to this.
‘Someday, either zombies walk the Earth or something close to that. Bitcoin is the solution’
— Patrick Byrne
As he drives to his mountain cabin, Byrne reveals that his company is a week away from accepting payments in
bitcoin,
and he sees this as a small but important step toward a financial
revolution the world so desperately needs. He has long warned that our
economy is hurtling toward another massive recession — what he calls the
zombie apocalypse — and he believes bitcoin can shelter us from the
fallout.
If the digital currency reaches its true potential, he tells me, it
might even avert this apocalypse all-together. “Someday, either zombies
walk the Earth or something close to that,” says Byrne, the son of the
man who built the GEICO insurance empire, Jack Byrne, and a protege of
Warren Buffet, the most successful investor in the history of Wall
Street. “Bitcoin is the solution.”
In recent months, countless others have floated bitcoin as a panacea for the world’s financial ills. But like
Marc Andreessen,
one of the founding fathers of the web browser, who has also put his
weight behind the digital currency, Byrne brings more than highfalutin
metaphors to the table. The 51-year-old has proven that, beneath his
wonderfully entertaining and often perplexing way of describing the
world, he has a knack for seeing where things are going before others
do.
The problem with the modern economy, Byrne says, is that it rests on
the whims of our government and our big banks, that each has the power
to create money that’s backed by nothing but themselves. Thanks to
what’s called fractional reserve banking, a bank can take in $10 in
deposits, but then loan out $100. The government can make more dollars
at any time, instantly reducing the currency’s value. Eventually, he
says, laying down a classic libertarian metaphor, this “
magic money tree” will come crashing down.
But bitcoin is different. It’s
like online gold: The supply of the digital currency is
controlled by software running across a worldwide network of computers, and its value is decided not by the feds or the big banks,
but by the people.
“It can make our country more robust,” says Byrne, a disciple of the
Austrian school of economics, which holds that our economy should rest
on the judgments of individuals, not a central authority. “We want a
money that some government mandarin can’t just whisk into existence with
a pen stroke.”
Zombies. Magic money trees. Mandarins. As Byrne admits, it’s a
ten-dollar answer to my ten-cent question about his plans for the future
of Overstock.com, and although I know the man well, I can’t help but
wonder how much of this is just him calling attention to himself. But a
week after this phone call, Byrne will make good on his promise, as
Overstock
becomes the first major online retailer to accept payments in bitcoin, letting you
buy everything from patio furniture to smartphone cases
with the fledgling digital currency. And the following month, during
Overstock’s quarterly earnings call, he will reveal that he has
personally converted millions of dollars into bitcoin. The Overstock CEO
is placing more than one big bet on an unpredictable future, but Byrne
has proven himself prescient before — about the internet and the media
as well as the economy.
It’s only natural that Overstock would be the first big-name company
to embrace bitcoin, and you can bet that Byrne is serious about pushing
the digital currency into the everyday world. On one level, Overstock is
your basic bargain retailer, a company that will sell you just about
anything on the cheap. But under the leadership of Byrne — who’s not
only a doctor of philosophy but a onetime amateur boxer — this is also a
company that’s seven years into a lawsuit that accuses venerable
investment banks Goldman Sachs and Merrill Lynch of a “massive, illegal
stock market manipulation scheme.”
‘He’s not just an opinionated jerk, though it sometimes sounds that way’
— Bill Hambrecht
At times, his battles with Wall Street have left him a lonely figure,
belittled by the establishment. For years, large portions of the
financial press questioned his sanity as he so vehemently — and so
colorfully — claimed that some of the biggest names on Wall Street were
complicit in a scheme to drive Overstock and other companies out of
business using a loophole in the stock market. But after the financial
crash of 2008, the Securities and Exchange Commission moved to close
that very hole. And in the years since, Overstock has established itself
as a profitable business, even as Byrne continues his crusade against
Wall Street.
“He’s not just an opinionated jerk, though it sometimes sounds that way,” says
Bill Hambrecht, the investment banker who helped Byrne take Overstock public in 2002 using what’s called a
Dutch auction,
a method that loosens the influence of the big Wall Street banks,
preventing them from taking their typically enormous cut of an IPO. “He
puts us on a little bit, just to bring attention to the issues. But he
has brought attention to them, and though he has made some wrong
calculations, he’s hung in there, and he has built a really good
business — something I don’t think he’s gotten proper credit for.”
Adopting bitcoin is the next step along this same road. As Overstock
embraces the digital currency, Byrne predicts it will spur other big
names to follow its lead, including rival Amazon, and push the world
toward a future where bitcoin is a true alternative to the dollar. But,
looking further down the road, as he is wont to do, he also believes
that the very public, math-driven system that underpins bitcoin can
remake Wall Street, eliminating the market loopholes he has railed
against for so many years.
The Sith Lord
Patrick Byrne calls it his finest moment. In August 2005, during an
hour-long conference call, he told an army of investors and reporters
that Wall Street was plagued by a campaign to exploit a flaw in the
stock settlement system and make millions at the expense of innocent
companies, including Overstock, whose share price was in free-fall. The
scheme, he said, was driven by a “Miscreants Ball” of players, including
hedge funds, financial analysts, government regulators, private
detectives, trial lawyers, perhaps the mafia, and even the press itself.
At one point, he went so far as to say that this sweeping campaign
was orchestrated by a single mastermind, someone he called the “Sith
Lord.” It became known as the “Sith Lord call.”
Over the previous six months, Byrne had waged an underground battle
against those he believed were trying to bury his company and others
like it. But the call brought his efforts into the mainstream, and it
would define Byrne in the popular press and across the internet for
years to come.
Though Byrne sees the call as his finest moment — a moment when he
exposed the dark underbelly of the financial world — much of the press
painted it as poppycock. The next day, he appeared in the
The New York Post
with a UFO flying over his head. And as he pushed back in pointed,
clever, and sometimes angry ways — insisting that the press was
complicit in the schemes he was fighting, that reporters were too close
to the hedge funds and banks they were covering — the heat on him only
grew.
At one point, he accused
Fortune reporter Bethany McClean of “giving Goldman traders blowjobs.” And this did not lead to more favorable coverage from
Fortune
or the rest of the financial media. “Maybe the Sith Lord is actually
Patrick Byrne himself — because he has become his own worst enemy,”
McClean later wrote in Fortune. “Nietzsche said it best: ‘Whoever fights monsters should see to it that in the process he does not become a monster.’” In
The New York Times, veteran financial columnist Joe Nocera
branded
the conference call “loony beyond belief” and described Byrne as a
menace who harassed reporters just to silence criticism of his company.
In the realm of public perception, it was quite a tumble for
Byrne. After he launched Overstock in 1999 — using the internet to
reinvent the flea market business, selling discount and clearance and,
yes, overstock goods on the cheap — he was a golden boy of the dot-com
revolution, an executive with a pedigree the financial media couldn’t
resist. As a teenager, he would skip school to spend afternoons with
Warren Buffet, his “Dutch uncle,” whose Berkshire Hathaway eventually
purchased his father’s company. He studied Mandarin at Dartmouth and
philosophy at Stanford, and after he finished his PhD, Buffet tapped him
to run one of Berkshire’s many companies, a midwestern outfit that made
uniforms for policeman, firefighters, and the military. “I was the only
goy in the schmata trade,” Byrne remembers. And as the first wave of
dot-coms went belly up, his new company used this to its advantage,
turning many of those bankrupt dot-coms into suppliers by snapping up
their inventory.
He was also tall and blonde and classically handsome. And he was a
three-time cancer survivor. In his twenties, Byrne was diagnosed with
testicular cancer, and it metastasized throughout this body. “His mother
called me and said: ‘If you want to say goodbye to Pat, this is the
weekend. The doctor doesn’t expect him to live much longer,’” remembers
Brown University professor Onesimo Almeida,
a close friend who first met Byrne in early-’80s China, sitting in the
lobby of the Bejing Hotel. “When we went to see him, he was skin and
bones and his voice had changed to this high-pitched squeal. He said: ‘I
think that I’m turning this around. I’m starting to feel better.’”
After Byrne fought back from this low point, the cancer returned twice
more, and twice more, he fought back. It was a narrative the press
lapped up time and again.
But after the Sith Lord call, all the praise turned to scorn. In addition to such enormous criticism from
Fortune and
The Times,
he received a constant stream of online vitriol from an army of other
news outlets and pundits, including, most notably, a former
BusinessWeek reporter named Gary Weiss, who ran a blog that seemed to exist only as a means of belittling the Overstock CEO.
Short Selling Gets Naked
Some call it a crusade. Others call it a jihad. But Byrne calls it his
mitzvah
— a holy mission pursued for the good of mankind. He launched this
campaign against many Wall Street practices, but mainly, he took aim at
something called “naked short selling.”
With a short sale, traders borrow shares and then sell them,
anticipating a drop in the price. If it does drop, they can buy back the
shares and turn a profit. A naked short sale works much the same way —
except that traders don’t actually borrow the shares. They sell shares
they don’t have, and if this happens in sufficient numbers, it can flood
the market with nonexistent shares — “phantom stock” — and actually
drive prices down.
Basically, Byrne was complaining about a flaw in the stock settlement
system, the system that controls the delivery of stock from one party
to another. Three days after a trade, a seller must deliver the shares
to the buyer. But with a naked short sale, this doesn’t happen. Shares
are sold but not delivered. Some
failures-to-deliver are a
natural part of a rapid-fire trading system, but massive failures in a
specific stock could indicate an abusive campaign to manipulate prices.
“The stock settlement system was a mess,” Byrne says, quoting legendary
investor Charlie Munger. “It was like having slop in a nuclear reactor.”
‘Someone who buys ink by the barrel shouldn’t get in a public fight with a man who buys bandwidth by the gigabyte’
— Patrick Byrne
Byrne’s stance was that hedge funds and banks were exploiting this
hole, that regulators and legislators were turning a blind eye to it,
and that reporters were ignoring the practice, too, if not actively
supporting it.
Certainly, most of the press discussed naked shorting as some sort of
myth created by Byrne and others. But even as his father, the onetime
chairman of the Overstock board,
came out against his son’s campaign, Byrne kept going, as only he could.
When
BusinessWeek reporter Tim Mullaney sent him a list of
questions — questions Byrne characterizes as the
“are-you-still-beating-your-wife?” variety — the Overstock CEO
promptly published both questions and answers on the web, effectively killing the magazine’s story. He
planted someone inside a meeting of the Society of American Business Editors and Writers,
recording what was said about him — that he needed to be stopped — and
posting that online, too. He created a new company, staffed by his own
journalists and web mavens, that would do nothing but fight his crusade,
battling the traditional press through a website he called
Deep Capture
— a nod to Byrne’s claim that regulators had been “captured” by Wall
Street, that there was a revolving door between the big banks and the
top positions at the SEC.
“Mark Twain said: ‘Never get in a public fight with someone who buys
his ink by the barrel,’” Byrne tells me. “I say: ‘Someone who buys ink
by the barrel shouldn’t get in a public fight with a man who buys
bandwidth by the gigabyte.’”
In 2006, when his efforts to expose Wall Street abuses were rebuffed
by Senator Richard Shelby, then chairman of US Senate’s banking
committee, Byrne went on national radio and called the Senator an
“ignorant cracker.” He and his Deep Capture team spent years trying to
prove that his biggest critic, former
BusinessWeek reporter
Gary Weiss, maintained control over the Wikipedia pages that painted
such a negative portrait of Byrne and his crusade — and eventually,
they succeeded,
digging up emails implicating Weiss and forcing his removal from the
site. Overstock itself went so far as to file a $3.48 billion lawsuit
against Goldman Sachs, Merrill Lynch, and seven other prime Wall Street
brokers, claiming they too were complicit in these naked shorting
schemes.
And, then, in the fall of 2008, the market crashed. The fallout would cast Byrne’s crusade in whole new light.
Photo: Joe Pugliese/WIRED
The Radioactive CEO
Years later, when I spend a few days with Byrne at Overstock
headquarters and sit down for dinner at his home, a jewel of a log cabin
just outside the ski resort of Park City, Utah, he’s still railing
against the ethics of market traders and the ineffectiveness of
government regulators and even the influence of the East European mafia
on Wall Street. Having steeped himself in philosophy at Stanford,
focusing on economics and jurisprudence, he describes the world almost
like a shaman — someone who sees things you at first don’t — and there’s
a palpable restlessness about him. He sometimes has trouble sitting
down for more than a few minutes.
He doesn’t talk like your average CEO, offhandedly sprinkling his conversation with allusions to everything from
Star Wars and the Dilbert cartoons to the Austrian-British philosopher
Karl Popper,
and he doesn’t dress like one. One morning, he shows up in a coat with
leather fringe that looks like something straight out an old Hollywood
Western. Another day, he arrives in a collarless button-down and a
blazer with no lapels, looking more like
Dr. No
or some other villain from the James Bond movies. Overstock executive
vice chairman Jonathan Johnson says that when he first interviewed for a
job at the company, Byrne was wearing a silk Chinese shirt with a
dragon print and an African millipede was crawling up his arm.
‘Patrick Byrne was pilloried in the press, who made him look like a
conspiracy-mongering lunatic. But sometimes, even conspiracy-mongering
lunatics are right’
— James Angel
But it’s Byrne’s Wall Street stories that raise your eyebrows the
most, the tales that play out more like pulp fiction than the life of a
bargain retailer. His naked shorting crusade began with a phone call
from an anonymous investor who still refuses to give Byrne — or me — his
real name. In the wake of the Sith Lord call, Byrne says, Overstock was
investigated five times by the SEC. And in early 2006, according to
Byrne and two others who were there, a man carrying messages for a
Russian crime syndicate threatened his life during a meeting on Long
Island, insisting he abandon his Wall Street crusade.
It’s no surprise that the biggest publications all but stopped
writing about him for a time. His story is so difficult for anyone to
get their arms around. His way with metaphor can leave the literal
minded scratching their heads. And perhaps more to the point, Byrne
spent so many years attacking the press as few other public figures
have.
His critics will tell you he wanted it this way, that his crusade was
merely an effort to deflect attention from his struggling company. “The
clever part about Patrick Byrne is that his attacks on the press really
caused people to stop writing about him,” says
Times columnist Nocera. “It just wasn’t worth it. You can write about sane people.”
But today, despite making such enemies on Wall Street, Overstock is a
company that has been profitable for three out of the last four years —
that one down year the result of its misguided attempts to rebrand
itself as O.co. The company’s move to bitcoin has begun to push Byrne
back into the public eye, this time in more positive ways. And though
few press outlets have said as much, his Wall Street crusade looks
prescient in the wake of the 2008 crash.
After Bear Sterns and Lehman Brothers went under and Merrill Lynch
was gobbled up by Bank of America, the SEC issued orders designed to
curb the very thing that Byrne had crusaded against. As those financial
houses struggled to stay afloat, it seemed, they too had been hit by
naked short sellers.
According to James Angel, a professor of finance at Georgetown
University and a visiting professor at the Wharton School of Business
who specializes in the nuts and bolts of the economic system, Byrne’s
warnings about naked short selling were nothing less than the naked
truth. “Patrick Byrne was pilloried in the press, who made him look like
a conspiracy-mongering lunatic,” Angel says. “But sometimes, even
conspiracy-mongering lunatics are right.”
Many agree with Angel, but others — including USC economics professor
Lawrence Harris and journalists like Nocera — still say naked shorting
was never the problem that Byrne said it was. All these years later,
this is still a hot-button issue, in part because Overstock is still
fighting its massive lawsuit against Goldman Sachs and Merrill Lynch,
but also because Byrne is so reviled by so many. “I find it unbelievable
that you think this is a complicated story with two sides,” Nocera
tells me.
But, whatever side you come down on, the larger point is that Byrne
is still fighting. Following the SEC’s new rules, naked short selling
almost vanished. But the agency has since indicated that at least part
of the problem still remains, and Byrne and others believe the practice
has moved into other parts of the market, including what are called
exchange traded funds. Once again, Byrne says, people are selling stuff
they don’t really have.
The $100,000 Ad
His fight is no less pointed — and no less entertaining. This past summer, he spent $100,000 on a full-page ad in
The Wall Street Journal, merely so he could mock the embattled hedge fund billionaire Steven Cohen.
The previous Thursday, a federal grand jury had indicated Cohen’s
company, SAC Capital, charging the $14 billion hedge fund with four
counts of securities fraud and one count of wire fraud for running what
prosecutors call an unprecedented insider trading scheme.
“Congratulations on the indictment, Stevie. And remember: roll early,
roll often,” Byrne’s ad read, calling on Cohen to give up his
co-conspirators. The ad even went so far as to claim that Cohen was the
Sith Lord that Byrne warned of all those years ago.
It was typical Byrne. When I press him, he can’t quite support this
claim, and certainly, the SAC indictment had nothing to do with naked
shorting. But Byrne has spent years complaining about the practices of
Cohen and SAC. In his own way, he’s trying to show that hedge funds and
banks are exploiting many holes in the system. And behind the scenes, he
continues to work in subtler ways to plug these holes.
‘People who come through those challenges, particularly when they’re young, have a very different view of the world’
— Robert Shapiro
Over the years, the Overstock CEO has cultivated a vast network of
like-minded souls who believe in greater reform on Wall Street. He has a
way of attracting Wall Street whistleblowers and then helping to push
their stories into the public eye, via the courts and through reporters
sympathetic to his cause. One of these whistleblowers is Mark Rosenblum,
a former employee at Thomson Reuters who sued the news and business
information firm, claiming he was fired for telling the FBI the firm was
selling key economic data to certain traders before it was released to
the rest of the market.
“I would not have had the courage or the necessary resources to come
forward without Patrick,” Rosenblum says, explaining that Byrne has not
only helped put him in touch with the right people but helped with his
legal bills.
Byrne’s crusade is almost pathological, and some argue this is a
product of his well-documented health problems. Over the years, he has
gone under the knife 29 times, including eight surgeries for an
irregular heartbeat, a residual effect of his cancer. His last surgery
was in late January. “He’s trained in philosophy — which means he takes a
larger view already — and he’s also struggled with his health,” says
Robert Shapiro, a Harvard-trained macroeconomist who served as president
Bill Clinton’s undersecretary of commerce and is now a consultant to
companies that believe they’ve been victimized by abusive naked short
selling, including Overstock. “People who come through those challenges,
particularly when they’re young, have a very different view of the
world. They are less concerned with the bullshit — and more concerned
with larger things.”
Some believe his cancer has nothing to do with his attitudes — and
that includes Byrne himself. But his concern and determination are very
real. It’s evident yet again with Overstock’s move to bitcoin. To many,
the bitcoin revolution is insanity, but after deciding the digital
currency was the way forward, Byrne struck a deal with a bitcoin payment
processor and pushed the digital currency onto his site in a matter of
days. “I didn’t want someone else to beat us,” he says. Days after that,
he moved millions from his personal fortune into the digital currency.
Beyond Bitcoin
Once again, Byrne is looking beyond the moment. He argues that
bitcoin is an idea that can change more than money. He believes it can
change Wall Street too, putting an end to the corruption he has spent so
many years fighting. And others agree.
Bitcoin is a currency, like the dollar or the euro, and it’s a money
transmitter, like a credit card network or PayPal. But at the most basic
level, the worldwide software system that underpins bitcoin is really
just a means of instantly verifying that you’ve sent something to
someone else. “It allows for the decentralized proof and transfer of
ownership,” says Fred Ehrsam, the co-founder of Coinbase, the outfit
that handles bitcoin transactions on behalf of Overstock.
‘You would have an instant, frictionless market, while having the added
benefit of wiping out a whole parasitic class of society — that is, the
whole financial industry’
— Patrick Byrne
Because its ledger of funds is completely public, users always know
how much money there is and where it is. That’s one of the reasons Byrne
is so attracted to it. He knows that, as with gold, the supply is
limited. Governments and banks can’t make more of it. But as Ehrsam
points out, the bitcoin framework could also be used for things other
than money — like stocks.
“It so happens that the first application of this is payments and
money, but it doesn’t have to be,” Ehrsam says. “It could transfer a
securities, too.” In other words, it would be feasible to build a
bitcoin for the stock market, a system that would quickly, easily, and
reliably move securities, a system that would make it clear who owns
what at any given time, a system, in other words, that could completely
eliminate naked short selling and other schemes like it.
When I toss that idea at Byrne, he tells me that he’s already thought
of it, that it could prevent an entire ecosystem of funds and banks
from gaming the market. “It’s like you’re reading my mind,” he says.
“You would have an instant, frictionless market, while having the added
benefit of wiping out a whole parasitic class of society — that is, the
whole financial industry.”
It’s an outrageous and ridiculously ambitious idea. But it also makes
perfect sense, and it just might happen. The bitcoin software is open
source, meaning anyone can make a copy and modify it as they see fit.
That includes Patrick Byrne.
Yes, some of the world’s brightest financial minds question whether
bitcoin even has a future as a digital currency. That includes no less a
name than
New York Times columnist and Nobel Prize winning economist Paul Krugman, who says
it’s not a reliable store of money,
much less a viable way of moving it from place to place. But that
doesn’t phase Byrne. He’s been there so many times before, and he
typically responds in the same way. “Paul Krugman was great,” Byrne
says, “until he went crazy.”
http://www.wired.com/business/2014/02/rise-fall-rise-patrick-byrne/?cid=18332654
