838: David Packouz | The Real-Life "War Dogs" Gun-Runner Part One.

25:17I assume most democracies have this kind of process because it's transparent and it's sort of capitalist and supposedly breeds efficiency, even though we found out that it doesn't. But this is a little bit of a tangent. But I'm guessing Russia doesn't have anything like this, right? And that may be why they have all these equipment issues in the Ukraine war. Yeah. Because corruption in this process would be so deleterious and inefficient. Yeah. So I don't know what Russia's official procurement process is, but they are famous for, or I should say infamous, for having corruption at all levels of the government.

25:52One of the most famous examples that we saw in the Ukraine war was that a lot of the convoy in the beginning that was heading towards Kiev, a lot of their tires were blowing out because they were using cheap Chinese tires and not the standard military spec tires. And then you have to question, well, why was that? Well, it was probably because someone along the supply chain decided that they were going to pocket the difference. And you see that in many levels of the Russian military. You see that in their space program as well. There's a reason why their space program has stagnated since the fall of the Soviet Union.

26:26The entire system is really built on patronage and on corruption, where everyone is really just looking to get in the good graces of someone more powerful so that they could get a little piece of the corruption pie. And that doesn't breed, obviously doesn't breed efficiency because there's money going towards, you know, oligarch yachts instead of towards where it's supposed to go. But it also doesn't breed innovation because it's very disconcerting and very disheartening for, you know, the engineers of the rank and file people when they know that like the resources they need are just being squandered by the higher ups and they don't get all the equipment they need.

27:06So they can't do the job that they need to do, but they also don't want to do it because they aren't getting a piece of that corruption pie. So they're going to escape by with as little work as possible. And this kind of is a remnant of the whole communist system where because there was no capitalist incentives for people to do a good job versus a bad job, everyone just did a mediocre job and did the minimum possible thing because there was not really that much room for advancement and opportunity. Or operated in the black market because they were like, my stuff's better. I should get a higher price.

27:50Oh, it's illegal. OK, I'm just going to break the law or leave the country and defect and go to a place where my efforts are rewarded. Exactly. To be fair, a lot of people are going to go, well, wait, this bidding process sounds like it takes a really long time. I bet we're not doing that with Ukraine. Right. Because now it seems like Biden says, hey, Congress, I need forty eight billion dollars. And they go, OK. And then it's right. Here's a bunch of weapons. It's a different sort of emergency situation. Yeah, I assume. Yeah. So with Ukraine, when you have like an emergency situation like that, the vast majority of the military equipment that was supplied to Ukraine since the start of the war was actually from the US military's own stocks.

28:30So equipment that the U.S. military already owned and was keeping in reserve for themselves. So the U.S. military can give that immediately. They have their own logistic system, one of the best logistic systems in the world, their own planes and everything. And they could just fly it all into Ukraine and supply them immediately. Now what's going on is because the U.S. military has used up so much of its own stocks that now they're trying to replenish those stocks. so they are putting out for contract to the manufacturing companies to you know manufacture more of the that equipment that they gave to ukraine that makes sense right because if you just say hey we're selling our own stuff because it's an emergency there's probably a lot less hoops to jump through and i i know a lot of it is hey we're looking for soviet era ammunition so we're going to get it from romania which is not going through the united states sort of bidding process.

29:24And also the Ukrainian troops are trained on this equipment. Their guns fire that kind of ammo. But once that stuff's gone, it's like, well, now we need Northrop to make those rocket systems that are going to go there. And that's probably going to take a longer time. The big issue is that because we live in a capitalist system and the military is the only buyer of these items, you know, no one else buys anti-tank rockets, right? So these companies that make this equipment, like Lockheed Martin, Northrop Gromond, they only have the minimum amount that they think, you know, they have the minimum production line set up that they think is the government is going to require.

30:04And for the past 20 years, the US military has been focused on anti-insurgency operations, which is very different than a large scale land conflict where you have to take out tanks. You know, the Islamic state, right, didn't have tanks. And so they didn't have to manufacture these anti-tank rockets or anti-aircraft rockets because they weren't being used. So for the past 20 years, the U.S. military has a minimum level of stock that they feel that they would need in a conflict situation. But they only really stock it for themselves, right, you know, for the various conflicts that they think that they might be involved in.

30:44They don't stock emergency supplies for a large land war in Europe because that hasn't happened since World War II. No one was really expecting that. So now that that's happened, and suddenly we're shifting from a peace economy to a war economy, not obviously the whole economy, but for these particular items, suddenly there's a demand for mortar shells that far, far exceeds what was a normal production rate in peacetime. and Ukraine is just eating it all up. Russia has massive quantities still left over from the Cold War, but they're starting to eat through that as well. So they're looking for some of the few friends they have, like North Korea and Iran, to step up and supply them.

31:31And now China, which it seems has been supplying them in secret, though they deny it. So everyone's scrambling for supply, And the United States and the West is scrambling to ramp up production because all those factories were on a peacetime footing. And now suddenly you've got a massive land war that's eating up. I think I read something like that Ukraine uses in one month of mortar shells, what the United States could produce in a year. Oh, man. Yeah. So it's a major, major problem. And obviously the side that runs out of ammo first loses. So everyone's scrambling. And that's why Ukraine has been getting such a wide variety of weapons.

32:16They've been using their old Soviet weapons, but now they're getting some NATO weapons, but they're getting, you know, some weapons from France and from Germany and from the United States. And it's this whole mix. And like some of those weapon systems use different ammo and definitely different parts. And so it's a huge, huge logistical headache for them. But they're happy to get what they can get because it's a matter of life and death. So they have to. You're listening to The Jordan Harbinger Show with my guest, David Pakows. We'll be right back. If you're wondering how I managed to book all these great thinkers, authors, creators, arms dealers every single week, it's because of my network.

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33:26You're not going to get billed. There's not a ridiculous upsell. That's just something that I think does well for everybody and makes you appreciate the show just a little bit more. So enjoy. Now, back to David Pakhouse. The stuff is cheap. The Ukrainians are already trained on it, right? This Warsaw Pact stuff. Yeah. The Warsaw Pact stuff, Soviet stuff, doesn't fit NATO arms, like you said, and it's just, what a mess. I know, I don't want to go too far down this rabbit hole, but it is interesting. The Soviet weapons really don't need a lot of maintenance, right? So it's like the U.S. weapons, part of the problem is it's like a Ferrari where the performance is out of this world, but you need to know how to drive the thing.

34:03You need to know how to take it apart and put it back together. Every part is specialized. You can't just take like a piece of metal and bash it into approximately the right shape to fit in there, you know, for like a high Mars or something. There's semiconductors all over the thing. So it's like that versus a Toyota Corolla where you're like, man, my mufflers make it a loud noise. Everybody can hear me coming. You know what? Give me that ball-peen hammer, that piece of aluminum, and give me some bolt cutters. I'll cut it into approximately the right shape, hammer it on this rock, and it's going to hold up until it doesn't.

34:33Yeah. I mean, that has been the Warsaw Pact versus NATO mentality as far as they're designing their weapon systems. The Warsaw Pact generally had lower-level trained soldiers, so they had to make their equipment much more forgiving. There's a famous case in World War II where the tanks that they were producing in World War II, the pins that held the tracks on were kept on falling out. On a tank? Yeah, on the tank. Okay. Yeah. And so instead of creating a new system of fastening the tank tread to the tank, they pretty much just put this wedge of metal so that the pins, as they get loose, they hit the wedge of metal and it knocks it back in.

35:15So that was a famous case of Soviet ingenuity and just kind of speaks to their design philosophy of the absolute minimum and simplest solution, which isn't necessarily a good performance solution, but it is cheap and they can do very, very large quantities. So that permeates their entire design philosophy for all their weapons and ammunition and systems. And the AK-47 versus the M16 is the most famous example. The AK-47 is famously durable. You could like bury it in the mud for 10 years and it'll still fire, but it's not the most accurate thing. The M16 is a much higher performance weapon, but it takes a lot more maintenance, a lot more care, a lot more training to use, which is why the United States decided to supply the Iraqis and the Afghanis after they invaded those countries to build up their army and police forces with those weapons and ammunition because they're already trained on them, as you said.

36:18And there also happened to be much cheaper, which saves the U.S. taxpayer quite a bit of money. It all sounds good until you realize that the way to sabotage a tank is to use a crowbar and pull out a few of these pins. And now the pin half drives and the frickin' tread falls off. Yeah, yeah, that's true. But luckily for the Soviets, they had 10 ,000 more where that came from. So, you know, and you see they're doing they're using the same philosophy now where they're just throwing poorly trained soldiers into the meat grinder of the war. It's it's quite tragic for the people of Russia because they don't bother.

36:54I mean, there were famous videos that came out, I think, earlier that showed that a lot of these conscripts that they're forcing to go to to war are being supplied with like rusty weapons. And some aren't even being given weapons at all. And of course, the Wagner group is recruiting from the prisons and they just use them as like a distraction, like the prisoners, they just throw them into the battle space and see where they obviously all get killed. But at least when the Ukrainians are forced to reveal their positions to fire on these incoming people, and then the trained soldiers can handle those positions now that they've revealed themselves.

37:36but it's a, they have a very low value on human life and they have no problem in just throwing people into the meat grinder with out much hope of survival. It seems like you're really up on geopolitical events. Were you like that when you were a kid or was it like, let's make some money with guns? And then you're like, Hey, the whole political situation that we waltzed into is kind of interesting. Yeah. No, I, I kind of got my education on the job, so to speak. I, you know, When I started, I had no idea about any of it. I was a musician. I was more interested in writing songs and listening to music and normal things as a person in their early 20s is interested in.

38:20And I just saw the whole ARMS thing as a lifetime of opportunity of a lifetime. And then kind of had to learn on the job, all the entire geopolitical situation of the world because it affected our ability to deliver. When we fly over certain countries, we had to know whether they were going to give us a permit or when planning logistics and what was the current political situation in that because maybe they'll say yes now, but there's an election in a month and depending on who's standing for election and who's likely to win will affect on whether by the time we want to deliver, whether that country is still willing to give us an overflight permit.

39:02So I had to learn all these things that I really had no idea about before getting into the business. Then it just became interesting to me. And now I find it fascinating, even though I'm not in that business. To be clear, I'm not in that business anymore. Right. Yeah. The interest in politics has endured the other parts. Yes. Have not. Exactly. The book is full of different angles that you guys spotted. Tell me about this Xbox deal, because this is almost, how did big companies miss this? And you guys are like, ah, let's go ahead and make 20 million selling frigging xboxes right so that was a strange situation and to this day i'm not 100 sure what the truth is about it okay what happened there was actually before i started working with the arms business um because i was importing sd cards at the time i was talking to all these uh electronics wholesalers and at the time the xbox had just been released, the original Xbox.

39:57And that's how long ago it was. But the Xbox was a huge smash hit and it got sold out of all stores and nobody had it. It was like being sold for triple the price on eBay at the time. And then one of my contacts from buying SD cards said, hey, you know, I've actually got a whole bunch of Xboxes that are for sale. And I said, well, that's obviously a great you know, opportunity because everyone, everyone's looking for Xboxes. So, but it was way more, I think he offered me like a thousand Xboxes, which was more, way more than I had money for. And so I, I talked to Ephraim and I'm like, Hey, you know, I've got this opportunity to do this deal with Xboxes.

40:38You know, I know you've got some money, right. You showed me, right. So, you know, you, you interested in doing this. And he was like, Oh yeah, that sounds very interesting. He talked to the guy and then it turned out that this guy was just a broker for someone else. And so somehow – and Ephraim, I'll give him credit, is a very talented negotiator, but he's also very – he can convince people very, very well to do things that they won't necessarily want to do. He's a really great – Persuader? Persuader. That was the one that was on the tip of my brain. I think you were trying not to say con artist, but that's a – he's a persuader.

41:12My words, not yours. He's that too. He is that. But so he managed to get the guy who was my contact to introduce us to his contact. And then that guy said, oh, well, the minimum order is 3000 units. And we're like, okay. And then it turned out that he was a broker for someone else. And he got him to introduce us to his contact. And we went through five layers. I'm not exaggerating here. It's like literally five different layers of brokers until we got to a company that it was, I forgot the name of the company offhand. But I remember at the time that it was a large multi-billion dollar electronics wholesaler.

41:49So it was not a nobody. And we were talking to people from the company because they had the official company address, which was why we thought it was real. It's amazing that though, like, hey, we have this lot of a really hot product. Everyone wants it. Let's talk to two random dudes that we met through three Chinese contacts. It's like, how are you not calling Walmart and being like, hey, notice you're out of Xboxes. Do you want 20 ,000 of them? We have them. Which was so strange, which is that part makes me think that it was some sort of scam. But if it was a scam, it was by a scam from people within this large, you know, electronics.

42:24Or it could be that they pulled something shady within their company and they were trying to offload this stuff. Stuff 100 ,000 of these in a warehouse. Nobody will know. It'll be sold out and then we will sell the crap out of these and we'll retire right after we do it. Right. Right. So like one thing that some Chinese manufacturing companies are infamous for is doing production overruns. So, you know, Microsoft will contract, you know, let's say a company to produce a million Xboxes and they'll make 1.1 million, but they won't tell Microsoft about it. But they will only make enough that they think they could sell without Microsoft noticing.

43:01so it can't be like a huge amount extra but it could be enough that they could double triple their profit margins that they're making from this contract with Microsoft and this is something that especially in the early days of Chinese manufacturing which is back then in like 2006 when this was happening this was pretty common so I suspect that it might if it was not a complete scam it probably was something a grain market like that not necessarily illegal but definitely against their commercial contract with Microsoft. Sure. So that's probably what was happening. You know, they didn't want to have like a direct contact between them and Walmart because Walmart obviously is going to, you know, advertise the shit out of this and say, hey, we've got Xboxes coming.

43:50Then Microsoft will be like, where'd you buy that? It'll be like, these guys, I thought they were official distributors. And Microsoft was like, well, they, we thought that, you know, they were already sold out because that doesn't add up. So, and then someone's going to get in a lot of trouble. So they were trying to sell it, you know, a little bit. On the low. Yeah, under the radar, yeah. It was like 100 ,000 Xbox consoles, right? This is not, it's not like a few hundred or even a few thousand, it's a massive amount. And it was, what's the value of that? Retail value of that's like$20 million or something at that point.

44:21Yeah, I remember it was a 20 million, we needed$20 million to buy it. We had already gotten a buyer from Walmart and Target who had agreed to purchase it from us at the retail price. So they weren't even going to make any profit on it. It was such a hot item that they wanted to use it as what they call a loss leader, where they have an item that is really in demand. And even though they're losing money on it, people will come in to the store and buy something else because they are attracted to go buy an Xbox. So while they're buying an Xbox, they'll buy some accessories or a game or something.

44:57And so Walmart will make money like that. And so they were willing to buy it from us at the full retail price. And the distributor was willing to sell it to us, I believe, somewhere along the lines of around 60 or 70 % of the retail price. So we stood to make like a good$6 or$8 million on this, if we could pull together$20 million. Wow. And we tried. I mean, we we worked for like a good solid week and a half, two weeks, looking, you know, pretty much asking everyone to invest in us. And we even got some meetings with some like hedge funds in New York. It just didn't pass the smell test. It was what they said, right?

45:36They declined it because even though like all the, you know, the suppliers were willing to do a letter of credit, which meant that, you know, they wouldn't get paid until they actually delivered the goods. So it wasn't like it was going to be a total scam because we'd be able to inspect the merchandise before the funds were released. So the payment process was solid. But as the hedge fund guys said, it just didn't pass the smell test, which I totally understand. It doesn't even pass the smell test for me these days. So eventually that ended up falling apart and nothing happened with that, at least not with us.

46:09Yeah, the hedge fund guys are probably like, this is a great opportunity that shouldn't exist. Something is wrong. we can't put our finger on it. We don't really want to be in a position where the feds are seizing the profits or the money that we spent on the, or the devices themselves when they hit customs, because it turns out these are Y boxes and they're made with all the parts and they run the games, but they're not really licensed. Yeah. Yeah, exactly. I love this story because it really does paint you guys as very savvy. Well, thank you. But also like really focused on money. And I know Ephraim was obsessed with money.

46:42You mentioned there's this casual anecdote where he's talking with federal contractors while he's having sex with his girlfriend, which is gross and weird. But like, this is what gets him off, not the girl. It's like, he's like, I'm negotiating. Yeah, yeah, yeah. He would brag about this to us. Actually, that's the only reason I even know about I mean, I'm not there looking. Yeah. But he would brag. He's like, yeah. So I was like, you know, banging my girlfriend. And then I got a, you know, call from the contracting officer. And I told her, hey, baby, you keep on doing what you're doing. I got to take this call.

47:11Of course she hates it, but she knows where her bread is buttered on, you know? He was so gross, yeah. It's so gross. It is so gross, but it paints a picture of just like exactly the type of guy that you expect him to be once you actually find out what this guy's like. You guys must have had Nick Cage posters all over the office. Lord of War was definitely Ephraim's, it was his favorite movie by far. He thought it was the coolest movie ever. And for his birthday, actually, I bought him one of the famous Lord of War posters, which is a picture of Nick Cage's face that's made out of bullets. And he loved it so much he put it like right behind his desk.

47:51Like, you know, like so when people would come into his office, they would see like the big Nick Cage poster right behind him above his desk. He just didn't know how to have his own poster made with his own face made out of bullets. That's what he really wanted. For sure. I'm surprised he didn't take some of the actual ammo you guys got in trouble for selling and have a sculpture made of himself made out of bullets. That's what I would have done if I was a gaudy arms dealer. In fact, I'm thinking about doing it now. I'm really good behind me. Just saying. He actually, I saw later. I mean, this was later, not during the time, but he did commission some artists to make a portrait of him.

48:24It's like a starter pack for narcissists. Like you need a sculpture and or a painting of yourself in your office. That's you looking at the people, like everyone dominating them. Really high up on the wall too. do not either. Exactly. The morality of some of these deals. I'm wondering if this got to you at all, because there's one where I think it was the king of Nepal wanted to buy weapons because there was an uprising and it was like, let's sell this guy weapons to kill a bunch of his own citizens. And then it's like, well, do we want to do that? That was really early on when I, when I started working with him, you know, like a few weeks into it, that one really threw me off.

48:59I mean, And so what happened was after the whole Xbox thing fell through, he said, hey, you know, let's get back to business that I know, you know, that I know we can make money on. You know, let's do the government contracting business. I'll teach you how to do it. You'll go for items that I'm not really focusing on so that we could expand the business and we'll split the profit 50-50. You know, you'll do all the work. I'll provide the money. I'll do the negotiation. We'll use my company's licenses and all that. And we'll split it 50-50. And so I said, that's great. And he's like, well, you know, I mainly focus on military equipment and munitions and weapons.

49:36But I know there's, you know, energy is a huge sector for the government. They buy massive amounts of oil and gas and various energy commodities. And so why don't you focus on that? So I started doing that. Actually, the first contract I won with the federal government was for 50 ,000 gallons of propane. It was with the U.S. Air Force. I delivered it to a U.S. Air Force base in Wyoming. Won that within, I think, the first month of starting. Made$8 ,000 for myself, not so bad, for a first contract. And while that was happening, I was working in the office with him. Well, his apartment. We were using his apartment as an office.

50:14Hashtag startup life. Yeah, exactly. Yeah, for real. He had this big desk in the middle of his living room, and it was just covered in stacks of papers because he loved printing things out. So like whenever we'd get a contract, he'd print out the entire contract. And that's usually like between 30 and 50 pages with all the addendums and everything. Oh, wow. He was working on so many different things at the same time. It just like became this huge mess. So, you know, I was working at it, you know, in his apartment and obviously hear what he's talking about on the phone. And he started working on, he got through one of his contacts in the industry, someone who wanted to supply the king of Nepal.

50:51And, you know, we looked up what was happening with Nepal and it turns out there were all these pro-democracy protests happening in the country. And so the king wanted to buy like attack helicopters and heavy machine guns and like a large amount of them and various crowd control equipment. and Ephraim was like, yeah, let's do this. We'll put together a save the king package. He was talking to his contact on the phone. I told him, I'm like, Ephraim, first of all, are you sure that's legal? Yeah, it doesn't sound legal. Yeah, because I'm pretty sure the US government wouldn't be happy with you supplying a monarch in order to suppress a pro-democracy government.

51:38Are you sure that's legal and it's kind of fucked up even if it is legal. And he's like, looks at me and he's like, just worry about your fuel contracts, bro. Okay. You, you leave this shit to me. Cool. I'll just be your accomplice because I'm also going to get in trouble for this since I'm right next to you, but okay. Yeah. So I was like, wow, you know, that's like, that's very concerning, you know, like, I mean, I wasn't working on it with him. And so I guess that's what I told myself at the time. I'm like, well, I mean, he's doing it, not me, you know, I'm working on fuel contracts. And so that's how I made, you know, I excused it to myself, but, but it was extremely disturbing.

52:14And luckily that whole thing fell through. I think he, the King managed to negotiate something. So the contract got canceled and he didn't end up buying all those things. Wow. So you're dealing with other arms dealers in other regions who are thinking like, oh, okay, well, where do I get attack helicopters? And I can't buy them from the US government, let's buy them from somebody who buys them from a supply. It's just seems like there's 16 brokers between you and the end user. Yeah, for some of these deals, for some of the deals. Yeah, I mean, because there's, so there's different ways that the arms business works.

52:46There's obviously the factories that manufacture these things in the first place. And that is usually the most expensive way to buy things. You know, you buy something brand new. Sure. But because all the militaries in the world tend to stock up on military equipment, and in the best of times, they don't get used. And sometimes countries' priorities shift, and then they try to change their military equipment, or something gets a little bit too old for their liking, and they try to sell it, you know, to get rid of it. And there's other countries that are totally okay with buying a little bit older equipment, as long as they get a good discount.

53:22So there's a large opportunity for brokers to do these kinds of deals. And that really all comes down to who you know and who you have connections with, because there isn't no like worldwide database of all the military equipment that every country owns. And, you know, that's available. You know, there's no Amazon of military equipment. Maybe now that I said that someone's going to create that, but I was going to say great idea. Yeah. Yeah. So it really comes down to the kind of connections you have in a lot of countries, especially countries that are not first world transparent democracies, they are run on systems of patronage and corruption.

54:02And so you need some sort of personal connection with the government or with the powers in that country in order to do these kinds of deals. And if you don't have that connection, you need to find someone who does. So that's where all these middlemen come in, Because it's like, I know a guy who knows a guy who knows a guy, you know, and everyone gets their cut along the line, including the, you know, the crooked politician or military official who is making, you know, this deal happen. Right. So you've got the supplier has to sell it to you and then go through the chain to get to the buyer. And each person along the way is probably like, well, I got to make a little 10 % margin here.

54:46So it's inflated crazily by the time it gets there, but it still has to be somewhat competitive or you have to bribe the guy more than the other company does or whatever it is. Yeah, so it depends on the specific situation. So the more desperate the buyer is, the higher price they're willing to pay. So if there's an emergency situation and it's a matter of life or death, they're willing to pay pretty much anything because what's good money for them if they're dead? And now if they are not in a rush and then price becomes more of an issue and then they can shop around a bit more. So it really depends on – but sometimes the buyer is corrupt themselves and they don't really care how much money they're spending as long as they can pocket some of that money as well.

55:36So there are different situations in these kinds of deals that can inflate or deflate the price. Interesting. Okay. Well, in the movie, Bradley Cooper plays this guy. His name's like Heinrich. Is it Heinrich Tomei? Heinrich Tomei. We called him Henry. Henry, yeah. He's a Swiss arms dealer. But who is this guy? Because he seems like the kind of guy who goes, I don't care what the weapons are for, right? He's, I don't want to say your mentor, but certainly a good contact for you guys. So Henry was probably definitely the most successful arms dealer we ever met. He'd been in the business since he was 18 years old.

56:11but he was in his, at the time we knew him in his forties, I guess now he's probably in his fifties, maybe even sixties at this point. Ephraim met Henry through Ralph. In the movie, Ralph is this Jewish laundromat owner who was the investor, right? But in real life, Ralph is a real person. He really was our investor, but he was actually a Mormon who owned a machine gun factory in Utah. Okay. Very different kind of character. Yeah. Different kind of, they really changed him in the movie. But they kept the name the same, which was, you know, Ephraim met Ralph actually through his dad. His dad was doing government contracting, but for non-lethal stuff for like boots and clothing and normal commodities like that.

56:58And I don't know how Michael, Ephraim's dad, met Ralph, I think through one of those deals. But when Ephraim won his first federal contract, He was looking for an investor because remember, as I said, you need to put up the money yourself before the government pays you 30 days after you deliver. So Efron was looking for an investor and his dad introduced him to Ralph. Ralph funded his first deal and they made money and Ralph was thrilled and so he agreed to continue funding his deals. So they did a whole bunch of deals together. And Ralph had known Henry since I think the 90s. They had done a deal where Henry, it was, I believe, illegal to purchase at the time, like weapons from like apartheid South Africa.

57:46Yeah. So Henry found a way around that by taking the guns apart and selling all the parts, I think, except the receiver, which was the only part that was legally considered a gun by the United States. And so he sold all the parts to Ralph, and Ralph put them back together in his machine gun factory and just manufactured the missing part. And so he made a huge amount of money through that deal. It was all legal, of course, because they managed to find that loophole. So that's how they established their relationship. And when Ephraim and Ralph started doing business together, Ralph introduced him to Henry.

58:24And Henry is a Swiss, as you mentioned, a Swiss arms dealer. So he had connections all over Europe. He was especially strong in the Balkans, had very personal connections with a lot of the power players. in the Balkans. And so he was able to get Ephraim very, very good deals on a lot of the weapons and ammunition that he was purchasing for the US Army in Iraq and Afghanistan. Later on, we found out that Henry, it came out in the papers that Henry had been the subject of a Amnesty International report. Never a good thing. Yeah, never a good thing. Exactly. They suspected him of supplying some warlords in Africa.

59:07But I don't know if it was ever, I don't believe it was ever definitively proven. He was just placed on a watch list of guys to be concerned about, not necessarily a banned list. So as far as I'm aware, it was still legal for us to do business with him. I see. Maybe not ethical, but legal. So in the movie, Bradley Cooper plays him like a badass you know like he's yelling he's screaming he's like you know has a hooker in his room you know like you know he's like uh uh he really played him like a badass but in real life henry was more he had more of the uh personality of like a swiss banker he's always dressed in a really nice suit perfectly brushed hair very calm voice never raised his voice never got excited everything it was like he was selling potatoes he was you know there was nothing to get excited it was he was just, you know, doing a regular boring job.

1:00:02And he's very professional. And I guess that's probably why he lasted so long. And he's still in business. He's still out there doing deals. I've heard last I heard he had some billion dollar contract with the Russian military to like refurbish their Air Force. Oh, wow. Some parts of their Air Force. But this was years ago. This was before the Russian war. So I don't know what he's doing now and what his like, I've lost contact with them. I'm not, we're not, we're not besties anymore. So. Got it. Yeah. Doesn't, doesn't, no longer follows me on TikTok. This is the Jordan Harbinger show with our guest, David Pakhouse.

1:00:42We'll be right back. If you like this episode of the show, I invite you to do what other smart and considerate listeners do, which is take a moment and support our amazing sponsors. All the deals, discount codes, and ways to support the show are at jordanharbinger.com slash deals. You can also always search for any sponsor using the AI chatbot on the website at jordanharbinger.com slash AI. Thanks so much for supporting those who support the show. Now for the rest of part one with David Pakhouse. That sort of answers the question of why he needs you guys at this point, because if he's on a watch list, he's might be like, well, I don't really want to pop my head up for all these little deals.

1:01:19Maybe I'll let these kids go do some legwork and then I'll just give them good pricing and skim off the top until the heat dies. Yeah, that's probably what it was. I also don't believe that he was registered with the US government, probably for that reason. But as I mentioned before, it's not enough just to be registered. You also have to build up a certain amount of past performance history in order to be eligible for the very large contracts. And I think I could imagine the reasons are similar to what you were saying. But he never stated his reasons for not bidding directly with the federal government.

1:01:57We just kind of assumed he wanted to keep his head low. He was supplying not just us, but he was supplying a few other contractors who were supplying the U.S. government. So he was the source for quite a few U.S. government contractors. Tell me about the Afghanistan contract. This is the big one that eventually, spoiler alert, gets you guys in big trouble. But why is Afghanistan buying anything from you instead of buying directly from the U.S. or Russia, for that matter, or even like South Korea? They make a bunch of arms. Why do a deal with you, Yatsis? No offense. None taken. None taken. So the Afghans were not buying directly from us.

1:02:37They were being supplied by the U.S. Army. So the way what happened was after the United States invaded Afghanistan and Iraq, and pretty much bombed, you know, the people in power to smithereens, they decided that the best way forward was to attempt to build a democracy in that country, a democratic government that was friendly to the West. in Afghanistan famously failed, right? After 20 years of trying. Iraq is teetering on democracy, but still, I guess, an official democracy at this point. Yeah, not a shining example. Yeah, not the best. Not doing that great. But part of the rebuilding process, the reconstruction process was building these institutions.

1:03:23The idea was that the United States would eventually leave. The United States doesn't have any policy of staying and taking, there was no idea of annexing Iraq or annexing Afghanistan and making it the 51st and 52nd state of the United States, like what Russia is trying to do with Ukraine. That wasn't the plan. The plan was to go and take out this unfriendly government and do a regime change to put in a friendly government. So part of that is when you, in order for the friendly government to stay in power is they needed to have a police force and a military and to fight the insurgents and their neighbors if they would attack them.

1:04:01And because the Afghanis and the Iraqis were already trained on the Warsaw Pact weapons, as we mentioned before, the United States decided to supply them with those kind of weaponry. They were already trained on it. It also happened to be like five times cheaper. So that was a bonus. But the United States doesn't manufacture these weapons. So the United States manufactures weapons of NATO caliber, NATO standards. So to get a large quantity of Warsaw Pact weapons and ammunition, they had to go to someone else. And originally they had to go to, speaking about the Afghan contract that we won specifically, the idea there, that was put out in 2006.

1:04:46George Bush was president and the Bush administration felt that the next president was because he was extremely unpopular at the time, his poll numbers were terrible. So they thought, you know, there's a good chance that the next president is going to be a Democrat. And they were right, Obama was the next president. But they thought the next president was going to pull out of Afghanistan immediately and leave them to their own devices, which he was wrong. It took until Biden to do that. But the plan was, because they thought the next president would abandon Afghanistan. They wanted to arm the Afghanis to have enough weapons and ammunition for like the next 30 years.

1:05:24And so they were looking to buy massive, massive quantities of munitions in particular, because munitions is something that's, you know, you eat it up, right? You know, just like we see in Ukraine. They're consumables. That's the term I was looking for. So because of that, they wanted to have massive quantities of munitions. And originally, the U.S. Army went to the Russians directly and asked them to supply this massive quantity of munitions. This came out in some news article I read later, but the Russians originally thought that they were joking because the quantities were so enormous. But the U.S.

1:06:01Army had to ask them multiple times, and they said, no, no, no, we're actually serious. We really want to buy this quantity. And the Russians said, sure, and they gave them a price. And then before they could finalize the deal, it came out that the Russians were supplying nuclear technology to the Iranians. And the United States got very upset about that and put the Russians on a blacklist, which made it illegal for the US Army to buy this ammunition, these munitions from the Russians. And so then they had to start looking for other sources of supply. And there was no other single source of supply that could supply this quantity.

1:06:36Only the Russians could do it. So they figured instead of dealing with 50 different suppliers from every former Soviet bloc country out there and having to deal with every headache that that entails, they're going to open it up for a broker type contract. And they put it out in their usual contracting procedures. They put the list, I think it was 30 something different types of munitions with massive quantities of each. And they said, give us a package deal. And we bid on that contract. We didn't really think we were going to win. Right. I was going to say, how did you even think you would win something like this?

1:07:12Yeah, we didn't really expect to win. But because it was all the kinds of munitions that we had already been selling to Iraq and Afghanistan, we technically qualified because we had the past performance history. So because there was a technical, we weren't automatically disqualified. We felt, well, in that case, we have to at least give it a shot. Even though it's like 20 times bigger than anything you guys have done in the past. Exactly. Literally 20 times bigger. Yes. Wow. This is what makes you guys successful at the end of the day, right? It's like most people would go, okay, Lockheed Martin's probably bidding on this.

1:07:47General Dynamics is bidding on this. Yeah. Raytheon or whatever is bidding on this. The government of Uzbekistan is bidding on this. Why would, I'm not even going to fill out this PDF. Right. And you guys are like, nah, let's do it. Yeah. It was, and it was a lot of work actually. It wasn't just filling out a PDF. No, of course not. But even if it was filling out a PDF, most people would go to hell with this. This is a waste of digital ink. Right, right. How do you decide what to bid? Because you have to choose the pricing. Yeah. It's very complex. Then you've got to choose a margin. How do you even come up with the price tag for this?

1:08:23So the way we did that, well, first what we did was we got a price from everybody we could find. Sure, yeah. So, so Ephraim obviously asked all his suppliers for their best pricing on all these items. And then he tasked me, and this was my role in the contract to find new suppliers that he was not aware of that he had not dealt with before. And so I scoured the internet. I like must've gone 50 pages deep into Google searches. I'm not even, not even kidding. Yeah. And I built these massive spreadsheets of every supplier and like half of them weren't even in business anymore. The other half didn't speak English.

1:09:01It was a mess. And like, they were all only, they were all in Eastern Europe. So I had to do this all, you know, late at four o 'clock in the morning. Yeah, exactly. Yeah. You know, a lot of them didn't have emails. They only had fax numbers. And so it was a massive, massive pain. It was a very grinding, time-consuming pain. But after a few months of work, you know, I was able to find suppliers that filled in the holes of where F-RM suppliers were missing. And we had what we thought was a pretty competitive bid. Also, Henry gave us a really good deal on the AK-47 ammo, which was a big component of the contract.

1:09:41And that would later get us in trouble because we later found out why that ammo was so cheap, but we didn't know it at the time. So after we got all the suppliers in the spreadsheet, And we also had to calculate what the estimated logistics costs, because the government wants you to give them a delivered price, not a cost plus shipping price. Shipping is always included to the government. Like Prime, Amazon Prime. Exactly, exactly. Shipping has to be included. So once we calculated the estimated shipping costs for each supplier, and we called up the suppliers, like five, Ephraim would do this.

1:10:19He was very good at this. He would call them up like five times and just bother them until they agreed to like lower their price even a tiny bit. He'd like just like keep them like pestering them until they would like, you know, and come up with all these crazy reasons why they need to give him a better price. You know, he was very good at this. He, he, he loved to say one of his lines was he'd love to say a negotiation is a contest between two people over who could come up with a better reason for things to go their way. Meanwhile, all these other guys are like, whatever. But yeah, he's probably also not afraid to say, like, if you do this, there's all these other deals that are lined up.

1:10:55You're going to and it's just BS. Yeah, he was the master of BS. I mean, he would promise people the world, he would say things in ways that you could take it in two ways. So he'd have a way to get himself out of it, if you would call him out on it later. He was a master manipulator, a master liar, he was extremely, extremely talented at it. And that made him a very, very powerful, very capable negotiator. And so he got all the suppliers to knock down their prices as low as they were willing to do. And then we had our price. And then it was time for us to put our margin, what we wanted to make on it before we bid it to the government.

1:11:32and Ephraim figured he was torn because he figured everyone else was going to do 10%. That's what he thought. So he figured he would do 9%. But then he started thinking to himself, but wait a second, what if someone else had the same thought that I had, that everyone else is doing 10%, so I'll do 9%. So then in that case, we need to do 8%. So he was like, but nobody's going to think that. So we don't have to do 7%. So it's really just 8 % or 9 % depending on which level of the other people are thinking. So he was torn. He's like, should we do 8%, 9%, 8%, 9 %? And he dawdled until it was literally half an hour before the deadline.

1:12:15This was one of the few contracts we had to submit in paper. Most contracts you just submit as a PDF online. But I don't know why. Maybe you could - It is a PDF. I was right. Yeah, no, it's actually a combination of PDF and spreadsheets. But yeah, you are correct. PDF and Excel spreadsheets. So we had a deadline and we had to actually ship it overnight from the post office. Like the post office was going to close in like 30 minutes and he still hadn't decided on whether to do 8 % or 9%. And I told him Ephraim, just pick something. It could be anything. We're going to for sure lose if you keep on not deciding.

1:12:52And he's like, fine, fine, fine. I can't leave money on the table. So let's do 9%. So we finally, we punched that into the spreadsheets. We printed everything out. The printer like broke halfway through that call. We had to like change the printing, you know, the ink cartridges. It was like, well, like the time is ticking. We finally left the office at like 10 minutes before 5 PM when the post office was going to close. Ephraim, you know, is like driving at like 70 miles an hour down like a suburban local roads you know where like the speed limit is like 25 miles an hour he's like driving like a maniac we like skid to a stop in the parking lot in front of the post office run run run run run run they were about to lock the doors and he like busts past the guy like knocks the postal worker to the side and he's like i gotta do this i gotta do this and like they almost didn't take it because he was just such a dick yeah but they're like fine fine fine we'll take it we'll take it and and they did it.

1:13:49I had a friend like this named Ofer from middle school all the way through college. And he'd be working on something all night, zero sleep, that's due at eight o 'clock in the morning after procrastinating for like a month until four o 'clock that morning. And he'd be on the phone with his mom and he's pacing and he's so nervous. And I'm like, just start the thing. What are you doing? It's 3 a.m. We're all like drunk and everything. And he's just like, I got a bunch of work to do. And the amount of stress that these guys, the types of, these types of guys live in. And tell me what you think. it's horrible to even be around it because it's so contagious.

1:14:21And you're just sitting there like, get away from me. You're freaking me out. It's extremely stressful because they, they, uh, they're stressed. Like it, you know, bleeds onto you because they, they're stressed and you're stressed. And, you know, I mean, I put a lot of work into that contract. I spent like a good, like two months of sleepless nights, scouring the internet and talking to people, you know, from Eastern Europe and sending faxes and, and all of these things. And then he was going to blow it because he couldn't decide on whether it was eight or 9 % and couldn't make a decision in time.

1:14:52So I was extremely stressed that he was just going to, you know, make us lose before we even got a chance to run the race, so to speak. Yeah, no kidding. Yeah. But, you know, he, he drove fast enough down those roads and didn't hit any child on the way. So we made it. yeah how do you then plan to get the weapons into afghanistan because are you going to like drive from pakistan that seems a little dodgy yeah war zone so we considered all these different ways so afghanistan's a lot landlocked country so the only way was either air which was extremely expensive because you know flying things by air uh it was i think something like five times the price than by ocean.

1:15:34Or the only other option was overland. But to do that, we would either need to go through Pakistan, which was an extremely unstable country, still is, or overland through the Central Asian countries. And for that, we had to transverse through Russia as well. And they didn't really want us to do that. The Russians apparently were very upset to have been cut out of this contract. And we found out later that they were doing all sorts of maneuvers to try to make us fail to deliver because they thought that if we failed to deliver, that the U.S. Army would come running back to them and beg them to buy the ammo despite the blacklisting.

1:16:17They tried to convince the Central Asian countries who are still very much in their orbit to refuse to give us overflight permits when we decided to fly it in. Oh, wow. Yeah, yeah. They really tried to make us fail. So we didn't want to take the chance of going through Pakistan because we were told that it's high likelihood that some warlord is just going to seize the shipment and then you're fucked. And then you supply a warlord with all this ammo, which is not a good thing. Right. Somehow you get in trouble for that. Yeah. It wasn't your fault. Right. Yeah. Or just Iran takes out the whole convoy with a drone or something or a militia.

1:16:55We realized that the only safe way to do this was by air. And even though it was extremely expensive, and we would have made a huge amount more money if we had done it over land, but at least it's going to get there and we'll make something instead of nothing. So it was really felt like our only option, really. But of course, it's extremely expensive to ship everything and buy with air freight. It's all depends on the price of oil, because that's the vast majority, I think something like 80 % of the cost of air freight is the fuel. So at the time that we won the contract in early 2007, there was a huge spike in oil prices.

1:17:31And a large responsible company would have bought like a hedge their bets, bought an oil hedge so that in case this happened, it's kind of like insurance. You would get paid for the oil price going up and you would use that to cover your losses on the increase of the air freight. Of course, that wasn't Ephraim's style. So he didn't like buying insurance. So he didn't. And then we kind of got stuck in a situation where the price of oil meant that we couldn't deliver a lot of the ammo that we had promised to deliver profitably. We would have been losing money on it, especially the AK-47 ammo, which Henry was supplying us.

1:18:12So we thought, well, how can we solve this? And I realized that the AK-47 ammo that Henry offered us was packed in these very heavy wooden crates. And if we could just remove the wooden crates, then maybe we can save a bunch of weight and at least make it, you know, I don't know if it'll be completely profitable, but at least it'll be, we won't lose as much money. But we have no idea how much those crates weighed. So we sent one of my best friends, Alex Padritsky, to Albania to go weigh the crates because we didn't trust the Albanians to give us accurate information. Sure. Yeah. In the movie, I go to Albania, but because they didn't want to add another character in the film.

1:18:54But I was already dealing with the US government contracting officers here. And I was dealing with all the other aspects of the contract with the Bulgarians and looking for other sources of supply, like from Kazakhstan and Ukraine. And I didn't have time to do this job. So we sent my friend Alex to do that. he gets there and he weighs the crate and it turns out to weigh quite a lot and by getting rid of the crates we would make it actually profitable instead of losing money but while he was inspecting it he said hey you know uh these crates they have like all sorts of chinese markings on them you know these this ammo is from china right and we're like what are you talking about that's from Albania.

1:19:37And he's like, no, no, no, it's got Chinese all over it. It's definitely Chinese. And we're like, fuck, we didn't know that. Because our contract specifically said, no Chinese ammunition can be delivered under this contract. Because in 1989, there was the Tiananmen Square massacre in China, where the Chinese military suppressed this pro-democracy movement of these university students and killed hundreds, if not thousands of students. And so as a punishment for the Chinese military doing that, the United States put them on an arms embargo. And so it's illegal for US companies and citizens to purchase or sell military equipment with the Chinese.

1:20:20So the US Army put no Chinese ammunition can be supplied either directly or indirectly was the actual wording in the contract. Yikes. So we realized, well, this kind of violates our contract. According to our contract, we cannot deliver this. But we realized this ammunition is actually from the 70s. So before the massacre. So like, I should fall through this loophole in the contract. Legally, if you bought ammunition or an AK-47 or anything while it was legal, like let's say 1988, right? And you bought it and you import it into the United States legally. Even in 1990, after you can't deal with the Chinese anymore, you can still sell that weapon.

1:21:03You still own that weapon legally and sell it to whoever you want. That's a legal weapon because you bought it legally. it's not like the embargo made all Chinese weapons everywhere illegal. It was just illegal to do business with the Chinese, right? So technically, according to the embargo, this ammunition in Albania was legal. However, our contract didn't specify that. Our contract didn't say anything. It didn't say anything about the embargo. It didn't say you can only supply weapons that don't violate the embargo, right? That's what it should have said. But instead, it said, no Chinese weapons, directly or indirectly, period, full stop.

1:21:41Lazy drafting. Exactly. Lazy contract drafting. Exactly. So we thought, well, okay, we've got two options, right? We could either tell them about it and say, hey, US Army, we're very sorry. We know our contract says no Chinese, but this stuff does not violate the embargo. Can we get a letter of exemption for this particular ammunition? And they could have said, yeah, that makes sense. We were lazy in drafting the contract. So here's a letter of exemption. Go ahead. We really need the ammo, right? Or they could have said something along the lines of, well, actually, all your competitors were bidding with this clause in the requirements.

1:22:21So it's not fair to them that you can deliver this stuff because they weren't allowed to bid this. So just in the interest of fairness, we're going to have to take this$300 million contract away from you and put it up for bid again. And we're like, do we want to take that risk? Or should we just not tell them about it? But what's Ephraim style, right? What would Ephraim do? Yeah. Not the right thing. Right. So Ephraim made the choice, you know, of let's not just tell them about it. I mean, we were planning on repackaging it anyway to save on the shipping weight. Let's just repackage it, continue repackaging it.

1:23:00Let's tell them that we repackaged it so we could inspect it to make sure it was good quality. Yeah, and save on freight costs. not a lot technically the truth yeah it is he also took out all that chinese documentation exactly too all those papers and he made sure that the people that we got to repackage it removed every single shred of uh of chinese documentation or chinese markings from anywhere and that's what got us in trouble is that there are emails from him saying oh make sure that you remove all the Chinese documentation.

1:23:34Smoking gun, no pun intended. For real. It's the emails that always get you. You're about to hear a preview of the Jordan Harbinger show with the world's best counterfeiter. How long does it take to print$250 million? Five months. It needs to be worthwhile. It's going to need to be perfect because perfect go big. One day for no particular reason, I was driving and thinking and I stopped at a red light. It just hit me out of nowhere. And I'm chasing something to make money from, sell something, make something, do something. All we do is to translate that into money. So we wake up in the morning and do that.

1:24:18I need to do something for money. Well, why don't I just literally make money? $1 million in$20 bills is about 50 kilos. So$250 million is 12 ,500 kilos or over eight Toyota Camrys or six Ford F-150s. That is multiple metric tons of cash. You must have been stoked, man, because you knew you were going to put$20 bills all over all of that and then just never work again yes when i did bring it in and then i slammed the door shut i was confident enough that everything i did off to that i hadn't done any mistakes i was good to go by design there are people specifically looking for you all the time this is all they do if you get suspected you know in any way let's say you're done you can tell them whatever you want They're not dummies.

1:25:17I mean, this is as high as it goes. This is stuff of a line. For more on how Frank Barasa created a quarter billion in U.S. $20 bills that look and feel genuine to experts, check out episode 488 of The Jordan Harbinger Show. All right, that's it for part one. All things David Pakows are going to be in the show notes at jordanharbinger.com. You can also ask the AI chatbot. Part two coming up in just a few days, if it's not out already by the time you hear this. Transcripts are in the show notes. Advertisers, deals, and discount codes, all the ways to support the show are all at jordanharbinger.com slash deals.

1:25:53I've said it once, but I'll say it again. Please consider supporting those who support the show. I'm at jordanharbinger on both Twitter and Instagram. You can also connect with me on LinkedIn. And the best things, by the way, that have happened in my life and business have come through my network. And I'm teaching you how to do the same thing for yourself in our six-minute networking course. It's 100 % free. It's not gross. It's not schmoozy. You can find it on the Thinkific platform at jordanharbinger.com slash course. The drills take a few minutes a day. I wish I knew this stuff 20 years ago.

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