Introduction: Distressed Investing 101 [00:00:00]
Shaan: So Scott Galloway was on our podcast and told a story about how he was buying distressed FTX claims after FTX went into bankruptcy. Everyone hated it — it was a disgrace, the symbol of a bad investment. But Scott was buying up claims on the cheap, and those claims are now being paid out in full or even more than full, because Sam Bankman-Fried had owned enough assets to make all the creditors whole.
When he told the story, he kind of dismissed it. He said, “I bought $2 million of FTX claims or something like that.” And Shaan and I were like, “Rewind. What?” That’s when he told the whole story.
And Scott gets made fun of a lot — there’s the “inverse Scott Galloway index” and stuff about his bad calls. But I think people don’t realize that he’s an entrepreneur who sold a company for $100 million and he’s done some interesting investing stuff. People have bucketed him as all talk, no walk because he’s so good at the gift of gab. So it was interesting to hear one of his “walk” stories.
After that, I got in touch with Tommy. I said, “Tell me about this. What are you doing?” He had some interesting stories. So I’ve invited him on to teach us about distressed investing, and then we’re going to play “first, best, worst, weirdest.”
Tommy, can you just give us a crispy description of what’s the big idea with distressed investing? What are you trying to do, and how do we wrap our minds around it?
Tommy: I am the bottom of the food chain of distressed investing. There’s a whole industrial complex of large distressed investing firms — Oaktree, Silverpoint, Farallon, Apollo — everyone’s heard these names if you’re in business or investing.
For myself, I came up a different way. My parents were bankruptcy lawyers. I learned a lot about bankruptcy and generally what you’re trying to do.
There’s a famous Michael Price saying: when you’re investing, you always want the steak and the sizzle. The steak is the known value — the substance, the margin of safety. The sizzle is the upside if things go right. The okay distressed investors find the steak — a double, but safe. The guys who really knock the cover off the ball are looking for both the steak and the sizzle.
Shaan: That’s even what the pitch on FTX was — you’re buying the steak at 20 cents, you’re going to get 30 cents in cash back, plus you have all this crypto sizzle. And unless you’re really aggressively against crypto, there was a lot of optionality built in.
If you look at the history of distressed investing, some of the best ones have been financial service bankruptcies, Ponzi scheme cases, the dotcom cases. You set yourself up to either get the sizzle for free or buy it extremely cheaply. That’s what they were doing in FTX, and that’s what we try to replicate in almost everything we do.
Inventing a Category [00:10:00]
Sam: Is your company just you? Are you a guy or do you have a team?
Tommy: I’m mostly just a guy. I have a small team. I get to choose when I work, how hard I’m working. If there’s no deals, I don’t have to work on stuff. And because I’m in a low-cost jurisdiction, that passes through to my clients. Scott’s probably not paying the usual fees you’d pay at a big distress firm.
Sam: Can I dumb this down? You find distressed deals, you convince rich people to buy them, and you take a small cut. Is that right?
Tommy: Yes. Or I invest my own capital.
Shaan: Before we get to FTX, you mentioned something important — some of the best investors in history invented a category. Can you give a couple of examples?
Tommy: Howard Marks is the prototypical example. He and a group of people invented the idea of institutional distressed investing as an asset class. What that does is compress the cost of capital and bring in a whole pool of capital that had never been invested in this area. Long-term returns might compress over time, but your early tailwind returns are enormous.
The same thing with early venture guys — Alan Patricof and people like that in the ’70s and ’80s. They invented the category. Of course they now have huge firms and you know the valuations for startups now — it’s because there’s this wall of liquidity that creates these tailwind returns.
Shaan: YC is a good example — they created the accelerator category. Pre-seed, pre-product, pre-revenue investing wasn’t really a popular category. Now it’s a whole industry: angels, super angels, seed funds, pre-seed funds. Paul Graham said it himself — it started as an experiment. He was curious how early you could fund somebody. Could you fund a student? A grad student?
The Mount Gox Trade [00:18:00]
Tommy: I had already been involved in a number of crypto distressed situations before FTX. I was very interested in crypto distress as a category. I thought: crypto is the future, and no one’s willing to touch it. So back in 2014-2015, I was already looking at Mount Gox. At the time, my partner and I were the largest buyers of claims in Mount Gox.
Sam: Mount Gox — for people who don’t know, it was sort of like the Coinbase before Coinbase, but with some nefarious characters involved.
Tommy: Yeah. Mount Gox was handling almost 80% of Bitcoin volume at the time in 2014 when it went under. It was the largest exchange. They had a pretty aggressive hack, tried to cover it up — which was the real crime — and eventually filed for insolvency in Japan.
You could buy claims for about a fifth of the market price of Bitcoin when Bitcoin was around $300. We were buying the claims for about $80 per Bitcoin.
Shaan: So walk me through this. I was a customer of Mount Gox, I lost my money. You knock on the door and say, “I’m so sorry for your loss. I’ll offer you something today for the rights to your claim.” And in that case, for every dollar worth of claim, what were you buying them for?
Tommy: We were buying at about $80 per Bitcoin when Bitcoin was at about $300.
Shaan: All right. So dumb question — they got hacked, so they don’t have the Bitcoin. What’s underneath? What made you think the claims would be worth anything?
Tommy: In Bitcoin terms, about 800,000 Bitcoin was supposed to be there. Within the first month or two, they basically found 200,000 Bitcoin. So you know 200 over 800 — creditors are going to get back roughly 25 cents on the dollar. We were basically offering 5 cents on the dollar.
The stake: they’ve got 200,000 Bitcoin sitting there at $300 a Bitcoin. Buy it at 25% of that value — that’s your stake. The sizzle: maybe they find more, maybe Bitcoin goes up. And we were buying at a fifth of the stake value.
Shaan: You’re like Michael Burry here. Sitting in your room, pouring through the papers, doing the math. Then you go to the hedge fund and they laugh you out of the room.
Tommy: The first hedge fund I pitched it to, the guy literally laughed me out of his conference room. Whenever I saw him around town after that, he would just go, “Bitcoin.” Like, it was a running joke. It was 2015, to be fair.
The fund was called Southpaw — a $2 billion hedge fund. They’re out of business now, if that’s any comfort.
I said: “This crypto exchange — you can buy claims for a fifth of the market value.” He goes, “Crypto? You mean Bitcoin?” I said yeah. He goes, “You want me to buy Bitcoin?” I said, “Well, you know, the claims — you get five times your money.” He started slapping his knee. He was like, “Tom, that is the funniest thing I’ve heard all week.”
Shaan: And you bought about $200,000 worth yourself?
Tommy: Yes. For my small hedge fund, it was like 10% of my money. I tried to call some guys I knew and bring them in. When you have a small hedge fund, you have a symbiotic relationship with the big firms — you can buy a $10 million deal and call, say, Oaktree: “You want $9 million of this? I want $1 million. You don’t even have to pay me anything, I just need the capital.” You co-opete with the big distressed firms. They call you with tiny stuff they can’t do; you call them with big stuff you can’t do.
Shaan: What did you end up making on Mount Gox?
Tommy: Our original investor made about 38 to 40 times their money — over about seven years. Some of it was the 5x discount, and the rest was Bitcoin appreciation.
Shaan: Get it for free?
Tommy: Basically. In 2018, the trustee had sold about 40,000 Bitcoin and brought in about $600 million of cash. There was $600 million in cash plus about $2.5 to $3 billion in crypto. We were buying claims for below the cash-equivalent value — about a $400 million valuation against $600 million in cash and $2 billion in crypto. So at that point, you were getting the Bitcoin for free. You’d already covered your downside with the cash.
How Small Investors Can Participate [00:30:00]
Shaan: As an outsider, when I see big bankruptcies like FTX or Mount Gox, I assume all the big dogs are already on top of it. There’s no opportunity for regular people. But you’re describing yourself as just a smart guy who gets in the mix and figures it out.
Tommy: Take out the “smart.” But yeah — you’re right that the big firms have the corner on the bond market. You can’t open a Fidelity account and trade distressed bonds. You call them and say, “Can I get a quote on this bond?” And they’re like, “That’s in default.” You say, “I know it’s in default — what’s the quote?” And they go, “We don’t trade defaulted bonds. Way too risky.” You need real prime brokers and serious money to play that game.
But there’s another side of the market — the claims market. There are probably only about 10 firms that really trade claims. And most people in the space are not super smart. It’s kind of like the lowest level of IT person — this is the lowest level of distressed investing. But I kind of like hanging out with the rejects.
Shaan: You’re like the little fish that eats the stuff that falls off the shark. The shark kind of likes you because you keep the barnacles off.
Tommy: Yeah. And what’s nice — in crypto cases like FTX and Mount Gox — the docket is largely customer account claims. It’s all trade claims. There’s not a lot of structured debt. Certain setups are just not appropriate for a home gamer to try. But you can literally buy claims — there’s nothing stopping you.
Sam: Do you put out a press release saying, “Hey, all 100,000 FTX claim holders, please email me”?
Tommy: Basically yes. On Mount Gox, Fortress was my competitor on that docket — Pete Briger is a big Bitcoiner, one of the Fortress founders, and they were buying up claims too. They would do press releases. For myself, the entire list of 14,000 Mount Gox creditors was a leaked list. So I could identify people on LinkedIn: under 35, into tech, part of the Bitcoin group. I’d ping them: “Hey, do you have a Mount Gox claim? If you do, we could buy it from you.” They’d go, “How did you find me?” It’s a lot of work.
Shaan: The work is: find the person, contact them, get them interested, verify their ownership, verify they haven’t already sold the claim. You’ve done the diligence and the cleanup work — that’s why investors trust you and why you get paid a carry.
First, Best, Worst, Weirdest [00:42:00]
Shaan: Okay, let’s play “first, best, worst, weirdest.” First — maybe you were a kid, maybe in middle school — what was your first foray into buying distressed assets?
Tommy: My parents were bankruptcy lawyers. My mom specifically was a consumer bankruptcy lawyer. I used to hang out at the courthouse as a kid, hang out with the clerk’s office and with U.S. Trustees. I kind of grew up around it.
My first real trade in claims was actually related to the music industry. It’s a long story, but essentially I was buying claims against a music royalties company that had gone under. I was very early in my career, very little money, and I think I bought claims for maybe $25,000 that ultimately paid out around $200,000.
Shaan: That’s 8x. On your first trade.
Tommy: It gave me the bug. I was like, okay, this actually works.
Shaan: What’s the best trade you’ve done? Your best single trade?
Tommy: Probably the FTX one. I’m still in the middle of it, but the math has been very good. Or a related one — I bought what I call the “SBF sizzle” — claims in various associated entities that had exposure to the broader FTX estate at very low prices. Those turned out to be very good.
Shaan: Worst?
Tommy: There was a situation where I thought I had a very clear legal case for recovering value from a bankruptcy and I was wrong. The legal system doesn’t always do what you think it’s going to do. Spent a lot of time, spent a meaningful amount of money, and got basically zero back. Just absolutely nothing. It was humbling.
Shaan: Weirdest?
Tommy: On the Mount Gox case, I had to go to Japan and talk to the Japanese court. I don’t speak Japanese. I have no knowledge of Japanese legal proceedings. I’m standing there in this Japanese courtroom — which is incredibly formal — trying to explain through a translator why I should be allowed to participate in the case. The judge is looking at me like, “Who is this person and why are they in my courtroom?”
Sam: Were you doing the bow thing?
Tommy: I was doing an excessive amount of bowing. Way more than was probably appropriate.
Shaan: This is like The Big Short goes to Japan.
Tommy: The Japanese legal system is incredibly interesting. But I’d also say — and this is why I love this niche — nobody else was doing it. It was just me and Fortress, basically. When you can be in a market of two, even if it’s a weird niche, the economics are pretty interesting.
Shaan: It seems like a good life. You’re hanging out in Europe, you work project to project. What’s the upside? Can you make tens of millions in a good year?
Tommy: Seven figures, definitely. Eight figures is harder. You get people pushing back on fees — “You’re not in New York, you’re not a real firm, it’s just a few guys.” But you build a reputation over time, people pay you more, and yes, especially in a good year with something that works out — eight figures is possible.
Shaan: The beautiful thing about this is what you said at the beginning: you invented your own category. Most of the big institutional players won’t go this small. The legal complexity scares off the retail investors. So you live in this middle space that nobody else wanted, and that’s where the returns are.
Tommy: Exactly. And what’s fascinating is, with every new technology cycle — crypto, AI — there’s going to be new forms of fraud, new company failures, new distressed assets. So the category keeps expanding. The work is figuring out which new wreck is worth diving into.