The Naked Truth - Patrick Byrne: CEO of OverStock.com Part 2

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You said that Mary Schapiro cleaned up the SEC, so to speak. Do you think that this is a trend that will continue after her tenure?

I don't think that this is temporary and I don't think that this is a small deal. I think that this is the beginning of an enormous network being rolled up. I think that this is the tip of the iceberg.

CNBC is already saying, “Did the FBI go too far today?” They don't get the joke yet. I think that they're just scratching the surface. I think this goes on and on in the hedge fund community. This is a community whose business model is, at least a really substantial part of it, breaking the law. There are a couple of dozen hedge funds – you know, I really think there are a half-dozen that form the core of it all – and then there's a couple dozen of very prominent hedge funds whose whole business model is breaking the law.

Outside of SAC Capital are there any others that you would like to shed light on?

I think the companies that are spin-offs of SAC Capital would be the second place I would look. I think that Dan Loeb at Third Point… I've already settled my beef with another hedge fund called Rocker Partners. We took care of that.

We're not going to do anything to divert attention away from Cohen. But it's Cohen, Maverick Capital, [and] Pequot Capital, which was shut down last year. But if you go into Deep Capture, look up Jim Chanos.

Look at it this way, Eliot Spitzer – it is reported, you can look this up – [his mistress], Ashley Dupre, and I'm not making any judgmental comments on her. I'm sure she was a fine young woman. But she was living in the house of Jim Chanos. Jim Chanos was Eliot Spitzer's biggest donor. That's all been publicly reported and acknowledged and Chanos said he didn't know who she was, he didn't know she was servicing Eliot Spitzer… Well that may all be.

But if it isn't, put it this way: if any hedge fund was involved in the procuring of hookers for Eliot Spitzer, that hedge fund owned himself the Attorney General of the state of New York. Right? If you bring him hookers, you own him. And if you look at the list of the companies shorted by Cohen and Chanos and guys in that little circle, and then you compare it to the list of companies Eliot Spitzer went after, you'll see a remarkable coincidence. So that raises lots of possibilities.

But imagine, if you're a hedge fund and you can short a company and get the Attorney General to bring a criminal investigation against it at the same time, you basically have a lock on the market. And if you're bringing the Attorney General hookers – now, Chanos has never acknowledged anything other than this woman was living in his house, his Long Island estate. So it may have been a coincidence that Eliot Spitzer's main gal was living in the helm of his biggest donor.

This can go on and on. These connections are so massive and so deep that I don't think this is something the FBI will be wrapping up this week.

Talk about your education reform initiatives.

I think the only way to get there is through choice. As long as you have an industry organized from the top-down, Soviet-style, you're going to Soviet results. You gotta organize industries from the bottom-up – that is, driven by the consumers.

Why do you think there are so many people in the fields of business and finance interested in reforming our nation's schools?

I think more people have come to see that fixing our education system is… If we're educating our children to the bottom standard of the world, we're determining our future standard of living. We're now 25th out of 30 industrial countries in our education results. We're clearly not maintaining our position in the world when we have turned out a generation of undereducated children.

I think any business or financial person, it's in their DNA to see that you can't fix it from the top down. These financial guys, they understand how this works. Their whole job was analyzing companies and seeing what kind of a business model was better than another business model. Well, they can apply that to the education system. Anything that's organized like the Soviet agricultural system will produce 70 years of bad harvest.

Let's hear the Patrick Byrne plan for fixing schools. What do you think has to be done?

Anything that gives children choice. A baby step in that direction is that backpack funding, where you can go to any school you want and the money goes with you. The next step along the spectrum is you get charter schools. Charter schools are, again, a bigger choice. The next step is either vouchers or, as Arizona has, tuition tax credits. I like the simplicity of vouchers. But with either of them the parents get to start figuring out – their parents don't get assigned by zip code, they get to choose where they want to go to school. And if a school is not giving ‘em a good product they can move to a different school. Only when you do that will the education system reform itself.

Obama has been an advocate for school reform with his Race to the Top initiative. Do you think there needs to be more programs like that or is he on the right track?

He's on the right track. I admire… I'm not an Obama-hater. I didn't vote for him. I voted for Ron Paul. But I would still like to see Obama succeed. I'm not one of those who wants to see him fail. But he really lost me when he… DC had an incredible voucher program started. It had amazing parental satisfaction. It was working. Everybody loved it. But it was a threat to the teachers' union. And President Obama let it fall to the lobbying of the teachers' union.

And then the reforms he is making are all reforms within the system. It's like a [pant manufacturer] could say, “This is how we're going to change our pant manufacturing.” Ultimately, as long as your system is some guy in a room deciding how many blue trousers to make versus green trousers, you've got the wrong system. It's gotta be market-oriented.

And ultimately President Obama isn't willing to tinker with that. And that's because, of course, the Democratic party is a subsidiary of the NEA, the teachers' union, and they will not let the Democrats… The thing the NEA fears most is parents having a choice. They want to maintain the monopoly, so they're fighting any form of choice any way they can. So they got their President – the President they helped get into the White House – they got him to kill, or to let die, the first test of the DC voucher program.

Do you think the recent election will have a positive or negative impact on school reform?

I think it will have a very positive impact because there are governors, and now state legislators, who are pro voucher, pro school parental choice. They now have the majorities in enough states that I think we're gonna see in the next six months some amazing pushes to get school choice passed in a variety of states.

OK, Patrick, we are giving you the loud speaker now to break any news or sound off on anything that you feel is not being properly reported.

The two things that are going to determine this country's long-term future is (1) fixing Wall Street and (2) fixing our education system.

Fixing Wall Street is going to be tough because the people in charge of policing Wall Street have become… Because Wall Street has turned into an oligopoly. They have such powerful lobbying interest in DC it is so hard to check them. As a result, what we're experiencing is what every toppling third-world country has experienced, we have an elite – an oligopoly [that pushed] the system up to the hill until the system cracked.

Then they turned around and said we need a bailout. Two years ago this country was dumb enough to bail them out. What we should have done… We drew a firebreak around the center of the banking system, the mega banks on Wall Street, and the US Treasury was gonna do whatever it takes to prop up the center of the financial system. It was exactly the wrong move. What they should do was build the firebreak around them and said, “Let them burn first,” and protect the rest of the country.

We're gonna get that chance again. There's another crack coming, another big pothole, and we're gonna get the chance again to decide whether we bail out the center of the financial system and hope next time to have the wisdom to seal it off. Let Goldman go under. Let J.P. Morgan go under. Let them go under. Let's protect the regional and the community banks from it – from the collapse on Wall Street and this whole country will be better off.

Where do you think the next crack or pot hole is going to come from?

The foreclosure scandal is being spoken of generally in the last month as if it's just a paper work scandal and there's that component to it. But there is also a disconnect between the number of mortgages Americans took, and the number of mortgage backed securities that the banks sold. The banks actually sold more mortgage backed securities than there are underlying mortgages. The difference is a big pothole. That pothole may be $100 billion. It may be $700 billion. It could be bigger than what we just went through. And that's the next one to come.

Tell us something about yourself that no one has asked you about in an interview before.

Well, I can tell you that I tend to be a Taoist. A Taoist as in the ancient Chinese philosophy of Taoism. We may know [of it in the West when it] mingled with Buddhism, [and when it went to] Japan it was called Zen. So the philosophical core of Zen is this ancient philosophy called Taoism.

I was raised a strict Catholic; I was an altar boy and all that stuff. But in my sense of obligations in the world, primarily from that upbringing, but my outlook on how the universe works is a very Taoist view.

What was the best and what was the worst investment decision you've ever made?

Best was Overstock. Worst was… Well, I would say that one of the deals I did when the S&L crisis occurred 20 years ago. I bought a lot of things out of bankruptcy. One package of assets I bought turned out to be worthless.