Patrick Byrne! In July I came forward to a small set of journalists regarding my involvement in certain government matters. No, I didn't, I'm lying, that's actually the first sentence of Overstock.com Inc. Chief Executive Officer Patrick Byrne's bananas resignation letter yesterday, I stole it from him. As soon as I read it, I thought: I will never start a piece of writing with as good a sentence as "In July I came forward to a small set of journalists regarding my involvement in certain government matters." So I figured I'd just give it a whirl, here, falsely.[1] Honestly though if I had lived the sort of life in which at some point that became a reasonable thing to say, I'd say it constantly, to anyone who would listen. I'd get it printed on my business cards. That's how people who watch a lot of spy movies imagine that people who are spies say "hey by the way I'm a spy." What a great, great, great sentence. I guess Byrne had to quit his job after writing that sentence, not only because he is going out on the highest of possible notes but also because the whole point here might be to call maximum attention to the fact that he ... apparently dated a Russian spy? Last week Byrne put out another press release with the absolutely amazing title "Overstock.com CEO Comments on Deep State, Withholds Further Comment," insinuating a bunch of spy stuff, and let me tell you, if someone says, unprompted, in the title of a press release, that he "withholds further comment," that's pretty much a guarantee that more wild press releases and interviews are coming. No one goes to such lengths to congratulate himself on not commenting further unless he is bursting with a deep physiological need to comment further. The gist of what he immediately told multiple reporters is that he had a romantic relationship with Russian spy Maria Butina, that he had a "non-standard arrangement" with the FBI in which he gave them information about Butina's activities, and that he ended up announcing the whole thing publicly on the advice of "my Omaha Rabbi," his winking way of referring to Warren Buffett.[2] Here I feel like I just have to emphasize that Patrick Byrne constructed an elaborate series of coy coded messages to announce to the world, "Warren Buffett told me to tell you that I dated a Russian spy and turned her in to the FBI." I think that if you polled business-school students and asked them if they'd rather (1) be the CEO of a public company or (2) have Warren Buffett advise them to publicly announce their romantic relationship with, and subsequent betrayal of, a Russian spy, quite a few of them would go for the Buffett/spy thing. So I can see why Byrne also picked that over his CEO job. What's he up to next? In a call from his car after delivering a farewell speech to his surprised employees, Byrne said he had his bags packed. "I will be sitting on a beach in South America shortly, and that is all I want to think about," he says. "I want to focus on getting back into good shape, doing yoga and becoming a vegetarian." Ah. Ordinarily if you are a shareholder in a controversial and heavily shorted company, and one day the CEO quits unexpectedly and announces that his bags are packed for South America, that is … you know, you hate to see it. Overstock's stock price was up 8.3% yesterday. "This is a tremendous catalyst for the stock," says an analyst, referring to Byrne's departure; "I think the latest controversy was one too many." That South America quote comes from Lauren Debter's Forbes article yesterday, which is a good overview of what is going on on the business side of things. Briefly: Byrne became famous as an online-retail visionary, and then he became famous as a crusader against naked short sellers, and then he became famous as an evangelist for blockchain in financial trading, and now he has pivoted to being famous for, uh, whatever this is. Overstock is partly an online retailer and partly a platform for various blockchain enthusiasms, but it is considering divesting the retail business to double down on the blockchain stuff. The blockchain stuff is pretty interesting but, so far, pretty money-losing, and shareholders have worried that Byrne's management style is distracting. Actually I wonder who will get the blockchain evangelism in this divorce. Byrne says he's resigning in part because "my presence is not conducive to strategic discussions regarding our retail business," suggesting that selling the retail business is still the plan even after he leaves. But then will the leftover Overstock focus as much on blockchain and security tokenization and punishing short sellers as Byrne did? Or will Byrne go off on his own and do that freelance somehow? The company store Remember Libra? It's a digital currency? Facebook Inc. was pushing it pretty hard a while back? Two months ago, actually, but it seems much longer. There was a brief exciting silly period when everyone was wondering if Facebook's new cryptocurrency could take over the world. I certainly joined in the fun, because it was fun, and I have no real regrets, but I must say that Libra has been pretty much a parade of tumbleweeds ever since. Here! Intensifying regulatory scrutiny of Facebook's Libra digital currency has spooked some of the project's early backers, with at least three privately discussing how to distance themselves from the venture. ... "I think it's going to be difficult for partners who want to be seen as in compliance [with their own regulators] to be out there supporting [Libra]" one of the founding partners said. With Libra's backers not speaking out in support of the digital currency, Facebook in turn has become exasperated by the members, according to two people close to the project. "Facebook is tired of being the only people putting their neck out," said one of the Libra backers. Maybe, like me, all the Libra Association founding members figured that Facebook would just steamroll any regulatory concerns and launch the thing. But in fact regulators and politicians have gleefully jumped in with concerns, and Libra seems no better defined or closer to launching than it was two months ago, and it's hard to see why the members should stick their necks out for a currency project that doesn't exist and that nobody can quite explain. Look, to be fair, if Libra fizzles Facebook will not be the first, or the hundredth, company to announce a crypto project with a lot of fanfare and then never make any visible progress on it. I look forward to revisiting my first column about Libra in a couple of years and smiling ruefully at how naive I was to think that the behemoth that has reshaped global politics and human relations could also launch an in-app payments system. Elsewhere, J.P. Koning writes about Starbucks cards. He points out that Starbucks Corp. has about $1.6 billion of "stored value card liability," meaning money that customers have loaded onto Starbucks cards but not yet spent. Starbucks pays no interest on these liabilities. In fact it's even better than that: Lots of people buy Starbucks cards (or receive them as gifts) and then forget about them; this is called "breakage," and it leads to an effective interest rate for Starbucks of almost negative 10%. This is a good deal for Starbucks! Depending on where you live, how negative interest rates are there, and how much coffee you drink, it might be a good deal for you too! But Koning goes further: The problem here is that Starbucks only sells coffee. Coffee is great, but the demand for dollars that are only useful for buying coffee will always be limited. To really grow the amount of stored value liabilities it issues, Starbucks would have to increase the usefulness of Starbucks dollars. One way to do this would be to open up the Starbucks app up to other stores. If consumers could also buy Big Macs with the balances on Starbucks App, this would increase the demand for Starbucks balances. To secure McDonald's cooperation, Starbucks would have to share the savings, breakage, and data. Maybe companies like Home Depot and Costco would join the Starbucks-McDonald's alliance. (And other chains, say Kroger and Burger King, might join the competing Walmart Pay alliance).
Sure, each of these companies could simply pursue their own independent stored-value liability programs. But wouldn't an alliance be better? From the customer's perspective, balances held in a single payments app that can be spent at Starbucks, McDonald's, Home Hardware, or Costco would be far more useful then dollars held in four separate and walled-off apps. And so collectively these stores should be able to get the public to hold more stored value card liabilities than they could individually. Which means more breakage, free loans, and data for everyone (and less for the banks, card networks, and central banks). We talk from time to time around here about Dentacoin, a hilarious cryptocurrency for dentists that sends me a lot of press emails. I once wrote: I am becoming increasingly convinced of my thesis that the story of cryptocurrency is not one of re-learning all of the lessons of modern capitalism, but of un-learning them. Here in the 21st century, I assumed that the purpose of currency was to intermediate between different goods and services, to make them fungible and commensurable, so that people didn't constantly have to negotiate the exchange rate between yams and goats, or between goats and dentistry. Who decided that the problem with dentistry is that it needs its own currency? In 50 years, I will reminisce to my grandkids about the olden times, when there was a single currency that you used to pay for food and rent and cloud storage and heroin and dentistry. "Wow, grandpa," they will say, "that sounds ... actually really convenient?" But perhaps it is a cyclical process. Humanity makes the great imaginative leap to come up with general-purpose money. Centuries pass and it is good. Companies make the less impressive but still useful imaginative leap to come up with single-purpose money (Money: But For Coffee) and, more important, they invent ways to convince people that they might want single-purpose money. (Get a free coffee or airline miles or a fancy card or the warm fuzzy feeling of associating yourself with a Brand, etc.) The single-purpose money does well, achieves pretty wide popular adoption for its single purpose, makes some money for its issuer, and so the issuer dreams bigger. The bigger dream is obvious: What if the single-purpose money could be used for other purposes? Money: But For Coffee: But Now For Everything![3] And so you end up in a world in which a coffee company controls the monetary system.[4] Or a social media company, or whoever. I mean, obviously you don't; right now Starbucks doesn't even control the payments system for Starbucks coffee. (There's $1.6 billion or so of money on Starbucks cards, but Starbucks has almost $25 billion of annual revenue.) Koning's suggestion is more a flight of fancy than a near-term business plan. But it is a tempting dream, and you can sort of understand how Facebook came up with the idea of Money: But For Facebook: But For Everything. The basic model is that, if the number of businesses in the world is infinite, you probably want a separate monetary system in which specialized entities (banks, government agencies, etc.) are in charge of money and payments for all of those infinite businesses. If the number of businesses in the world is one, then obviously it can handle the monetary system; it can just keep the accounts of how much everyone is allowed to spend on its products. If all you buy is Starbucks, Starbucks gift cards are the only currency you need. Of course that is an absurd limit case, but as we approach that limit—as people spend increasing proportions of their wealth at a smallish number of giant companies or platforms—it becomes more plausible to talk about companies or platforms taking over the monetary system too. Noisy shorts There are two basic ways to make money as a noisy, "activist" short seller: - Quietly build a big short position in a company's stock, noisily announce that the company is a fraud, pursue it to the ends of the earth, and ultimately become rich if the stock goes to zero (or lose a bunch of money if you're wrong).
- Quietly build a big short position in the company's stock, noisily announce that the company is a fraud, watch the stock fall on your announcement, cover your short position at a quick profit, and move on.
The first approach is probably the correct one. For one thing, it is the approach that most activist short sellers are temperamentally suited for; these are just people who really enjoy a good pursuit to the ends of the earth. For another thing, there is more money in it; taking a high-flying stock to zero is more profitable for a short seller than knocking 10% off the price and covering quickly. Most important, though, the second approach looks really bad: If you short, come out with a big fraud report, and cover immediately, everyone will assume that you didn't have much belief in your this-company-is-a-fraud-and-will-go-to-zero thesis and that it probably wasn't true. In fact they will assume that your report was not entirely in good faith, and that you announced it only for the quick reaction. (Basically any activist short seller will always be accused of securities fraud, but if you take the second approach you'll really be accused of securities fraud.) If you are a repeat-player activist short seller, your reputation is valuable to you, and you want to build a public track record of correct calls; walking away from them immediately does not help with that. But the second approach has some benefits. It's quicker! A 10% profit in a couple of days might be more appealing than a risky years-long fight to get either a 100% profit or a total loss. Also, in the U.S., it's not like hedge funds have to publicly disclose their short positions. You could short, announce, and cover without anyone noticing immediately, or maybe at all. (Eventually you have to tell your investors, but maybe they can keep a secret, or maybe you can just explain that circumstances changed.) Anyway here's a weird story about Harry Markopolos's crusade against General Electric Co., and the so-far-surprisingly-anonymous hedge fund that shorted the stock and promised Markopolos a share of the profits: When Harry Markopolos dropped his bombshell report skewering General Electric Co., he revealed that he was working with a short seller to profit from the stock's decline. Eight days later, that firm's identity remains a mystery. Markopolos has offered few details about his partner, saying only that it's a midsize hedge fund based on the East Coast -- and one not normally known for shorting. "I promised confidentiality," the accounting examiner said on CNBC. … Why is the short seller staying in the shadows? Is the firm worried about legal risks? Does it want to avoid publicly attacking an iconic company? Is it less confident than Markopolos? I don't know either, but I assume the hedge fund is still short, because (1) covering really would be bad form and (2) presumably Markopolos negotiated for a share of the large profit that would come from being right, not the small profit that would come from covering on the first day when the stock was down 11%. Still if you were looking for the quick hit, this would be the way to do it! Markopolos's partner is anonymous and "not normally known for shorting," and it is effectively monetizing his reputation for fraud-spotting, not its own. There are some tactical advantages in separating the financial risk of doing the trade from the reputational risk of being its public face, and you could imagine getting some efficiency gains from splitting them up. Things happen Cracks Forming in Leveraged Loan Market as Another Deal Pulled. Loan funds on course for worst outflows on record. Jes Staley: the last man in European investment banking. Deutsche Bank to transfer up to 800 staff to BNP Paribas. There's a black hole in the dollar funding market. How Private-Equity Funds Can Artificially Boost Their Returns. Walmart Lawsuit Threatens to Undermine Tesla's Bid to Reboot Solar Unit. Bank of New York Mellon Loses Key ETF Customer to State Street. RBS, Santander Ordered by U.K. Watchdog to Fix PPI Breaches. Top law firm Weil Gotshal botched millions in pay for bankers. Addressing Economic Insecurity: Why Social Insurance Is Better Than Corporate Governance Reform. Anthony Scaramucci keeps saying things. Florida vacation home invaded by vomiting vultures. "What the heck is crab rangoon, and how did it happen?" If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Perhaps I should have saved it for a novel? *Great* first line for a certain sort of spy novel, really; more Le Carré (or Harry Mathews, or Javier MarÃas) than James Bond, a grizzled but humorous old hand's understated way to start the tale of his quirky life in espionage. [2] Really! Byrne's father ran Geico, and Byrne has known Buffett since childhood and visits him in Omaha sometimes. "At the most recent visit – a few weeks ago – though I know nothing about the subject he was describing, I told him to follow his conscience," Buffett told reporter Sara Carter in an email. [3] This description has some obvious overlap with the evolution of airline frequent flyer programs, which started as airline loyalty programs and became a strange sort of general-purpose currency. [4] Incidentally if you could use Starbucks cards at lots of places, and they did a good job of growing the pie by getting more people to load more of their money onto Starbucks-Plus cards, presumably breakage rates would go way down? Like presumably some number of people are not spending Starbucks cards because (1) they got them as gifts and don't drink coffee or (2) there's like six dollars on the card and it's easy to forget. But if you put $1,000 on your card because you can spend it anywhere, you will. |
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