WeWait Well, but, what changes in a month? The We Co., the parent company of WeWork, filed to go public last month, and it has been ruthlessly and continuously mocked ever since, and yesterday it apparently decided to postpone its initial public offering "until at least October," and issued a passive-aggressive statement saying that it is "looking forward to our upcoming IPO, which we expect to be completed by the end of the year." Like everyone else I participated in the mockery, and now I feel a little bad about it. Come back WeWork, we were only kidding! I mean, I was just having some fun, but it is not my money. Presumably WeWork's main reason for postponing the IPO is that investors were not all that jazzed to buy shares at a valuation WeWork (or its big early investors) could stomach. Presumably they weren't kidding. But if you don't like WeWork now, why would you like it in October, or December? I suggested recently that delaying the IPO could be a (more or less accidental) way for WeWork to demonstrate that its business model actually works: If its growth slows (because it can't raise money from the IPO to plow into new locations), it will automatically become profitable as existing locations mature and prove the attractive unit economics of its underlying business. Or that's the idea anyway. And then when it returns to the market it can say to doubters "see, we told you that this thing will make money in the long term." But I didn't mean October. If the IPO happens by the end of the year, it will be with at most one extra quarter of financial results (the quarter ending in two weeks), which seems unlikely to change anyone's mind about the long-term viability of the business model. Similarly, if your worry about WeWork involved its corporate governance and potential for conflicts of interest, what will change? The governance has already improved since the original IPO filing, but that apparently wasn't enough to convince investors, and founder Adam Neumann still controls the company through super-voting stock. If you don't trust WeWork, there's only one governance change that will really matter, which is getting rid of the super-voting stock and letting shareholders, rather than Neumann, have the final say over the company. There is a sort of everything-is-connected theory of technology unicorns, and of capital markets generally, which holds that investors, like, eat a bad breakfast or whatever, and then they won't buy anything for a month, but if you come back later they'll have had a better breakfast and they will buy. This is not entirely untrue, but they will probably remember WeWork. Like if you are some smallish unheralded tech company and you go to your bankers and start working on an IPO and then, before you file to go public, the bankers say "the market conditions are not great, better to wait six months," then it is probably true that you will get a fresh look in six months if market conditions are better. But if you are WeWork, and you are a big famous unicorn, and you do file your paperwork and everyone talks about it for a month, and then you postpone your IPO, when you come back to the market people are not going to start from scratch. The market will be humming along and unicorns will be going public left and right and their stocks will soar and everyone will be happy and then you'll drop a revised WeWork prospectus and the music will cut out and it will be pin-drop quiet and everyone will glare at you and then shuffle awkwardly for the door. Once you get a reputation as a party-killer, it is hard to come back to the party. I don't know! There is a lot of groupthink in these things, and Neumann is a famously effective salesman for his vision, and it's certainly possible that WeWork will use the time wisely to build support from big investors without the glaring spotlight of an imminent IPO. There is no objective catalyst, sure, but the thesis here has to be that some large public institutional investors believe, or can be persuaded, that WeWork is worth meaningfully more than $20 billion, and that in the current environment they are not willing to stick their necks out to buy shares at that valuation, but with some quiet reflection they might get there. I don't think that's a crazy theory at all, but it is not a strong position for the company to be in. While I have you here, can I tell you a random thing about WeWork that I just learned? It's not new news or anything, but it was new to me. Back in April 2008, WeWork issued $702 million worth of high-yield bonds at a yield of 7.875 percent. The deal went well—five times oversubscribed, priced at the tight end of the marketed range—but then quickly fell in the aftermarket, and the bonds traded as low as the high 80s in early 2019. At some point this happened (from WeWork's IPO prospectus): During the six months ended June 30, 2019, the Company repurchased $33.0 million aggregate principal amount of the Senior Notes for total consideration of $32.4 million. The Company recorded a gain of $0.3 million in connection with these repurchases. This is fine, really: They sold bonds at 100 cents on the dollar, the bonds traded down, so they opportunistically bought some back at, uh, 98 cents on the dollar. It's a profitable trade, selling stuff for 100 and buying it back at 98.[1] WeWork, I have often said, is an interesting engine for financial arbitrage, so in a sense it is not surprising that they decided to do this trade. But it looks a little strange now. For one thing, the bonds fell after the IPO was delayed, so the bonds that WeWork bought for 98 are now trading around 96. For another thing, WeWork is losing access to as much as $10 billion in IPO proceeds and IPO-contingent credit facilities, and it consumed about $2.6 billion of cash in operating and investing activities in the first half of 2019. It could kind of use the money! Not that $32.4 million is much in the WeWork scheme of things, but still. This feels like a trade that made all the sense in the world a few months ago when WeWork was a beloved unicorn, and when it was counting on a credit rally and $10 billion of cash from going public. Now it seems a little too cute. Repo The way the U.S. financial system works is, companies set aside a little money from their profits each day to pay taxes at the end of the quarter, and while they wait they park the money in money-market funds. And then the money-market funds use the money to make overnight loans to banks, who use it to buy U.S. Treasury bonds, or who lend it to hedge funds who then use it to buy Treasuries. That is not a complete description of how the financial system works! Really it is only a couple of small strands of it.[2] But the thing is, the whole thing is made up of strands. Every day, there is more or less an auction in which banks bid for overnight access to idle money—money that investors and companies are keeping in short-term cash for whatever reason, including to pay their near-term bills, including their tax bills—so that they can use that money to fund their Treasuries. The clearing price in this auction—the price to borrow money overnight, secured by Treasury bonds—is more or less "the interest rate." I mean, there are lots of interest rates, but the overnight-secured-by-Treasuries rate is a particularly atomic one: There is a big deep liquid market for it, it is effectively risk-free, and it is the shortest practical interest rate so you can build a term structure on top of it. And so a couple of overnight-lending-against-Treasuries rates are important, and used as references for other things, and one will probably replace Libor as the standard U.S. dollar interest rate for floating-rate loans and derivatives, and they tend to be correlated to each other and to other important rates like Federal Funds. But also, just, there is that auction, and people have particular individual motivations and needs in that auction. And sometimes a lot of Treasuries come on the market all at once and banks will need more money to buy Treasuries, or to hold on to the ones they have. And other times companies will actually have to pay their taxes, so they will take money out of the lending-to-banks-to-fund-Treasuries account to write a check to the IRS. And sometimes those events coincide and weird stuff happens: A sudden surge in the overnight rate on Treasury repurchase agreements that began on Monday continued Tuesday -- with the rate opening at 7%, according to ICAP. … What happened was an unfortunate coincidence -- just as companies were withdrawing cash from money markets to pay corporate tax, a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. With just $24 billion of bonds maturing in the period, this became one of three occasions this year when the imbalance between debt redemption and cash needed to buy new Treasuries exceeded $50 billion. Suddenly there was a scarcity of dollars at the same time as a glut of Treasuries, which banks typically lend out to investors with spare cash through repurchase agreement. At a macro level, interest rates are about macro stuff, about time preferences and fiscal and monetary policy and predictions for the economy. But the specific thing that creates the interest rates is that some people show up to an auction with money and some other people show up to the auction with Treasuries, and if the people with money oversleep or the people with Treasuries have some extra Treasuries then that will affect interest rates too. Seven percent is not, like, the correct interest rate—the correct interest rate probably starts with a 2—but it's what the market said. I am not by any means an expert in these markets, and I am sure that some of you are already writing me emails to say that the corporate-tax accounts are a small part of the problem and the real issue is the Ruritanian banks who need to swap their dollars into doubloons to fund the mushroom harvest. But there is a more general point here which is that money markets are aggregations of specific actors' demands for money for specific purposes, and those demands can fluctuate for pretty idiosyncratic reasons, and every so often the fluctuations will not offset smoothly and the rate can get weird. This is, in some sense, bad; it would be nice if these short-term rates were macroeconomically comprehensible and relatively stable from day to day. "We've had these unusual spikes over and over again," tweeted Bloomberg's Tracy Alloway, "which suggests something liquid is missing in the financial system (probably bank reserves)": In a perfect world there would be actors (meaning banks) who could take the longer view and smooth out the fluctuations. But on an aesthetic level it is kind of impressive that it works at all, that the rate that balances companies' daily savings for tax bills and banks' daily purchases of Treasuries and a hundred other decisions is as stable as it is from day to day. Anyway you know who has a lot of money and a long view? The Fed, which announced this morning that it "will conduct an overnight repurchase agreement (repo) operation from 9:30 AM ET to 9:45 AM ET today, September 17, 2019, in order to help maintain the federal funds rate within the target range of 2 to 2-1/4 percent." Finfluencers I am sorry to say that I suspect there might be some overlap between readers of this newsletter and readers of finance memes, so in the interests of being servicey I am going to send you to this (very good and funny!) Institutional Investor article about, hmm, let's see, how funny it is that some people say "Ebitda" and some people say "Ebit-D-A": "The pronunciation of EBITDA is one of the most absurd things in my job," @hoeingforyield says. "All the crazy ways people pronounce and get away with it is funny to me." He often pokes fun at folks who say "EBIT-Dee-Ayy" rather than the more accepted "EBIT-Dah." See, there are … memes … and they … you know what, I think I am going to outsource the rest of this to block quotes. Finmemes are memes that are highly specific to finance. And on Instagram, they're growing more popular by the day — the modern equivalent of cocaine and liar's poker games on 1980s trading floors. Your analyst might be posting one now. Or maybe you're that analyst. And: "What I find funny is making fun of managing directors," @litquidity says. "The guys who are up top, they bring in all the money. As a junior, you're like, 'Man, my boss is quite a character.'" He started a hashtag called #whomstMD to chronicle the exploits of wealthy-looking men doing "something outlandish" like wearing Gucci loafers to the gym. Out of that hashtag, as well as #MDMovesOnly, grew one of @litquidity's offshoot accounts called @thisguyfuchz. The account belongs to a fictional 40-year-old who lives in Connecticut and works on Wall Street. Fuchz has trouble dialing into conference calls, plays phone games like Candy Crush under his desk, and uses archaic abbreviations like "thx" when signing off his emails. To be fair that "thx" is a meme too, in its way. Like the analysts are going on Instagram making fun of their MDs for saying "thx," but the MDs are going on email trolling their analysts by sending them miserable last-minute demands and signing them "thx." You don't write "thx" because you are genuinely grateful but bad at typing. You write "thx" to drive home the fact that you're an MD and the recipient isn't. Society, etc. "Crowdfunding campaigns have become the go-to funding option for more and more people who find themselves stretched by the costs of a medical crisis," begins this report from dystopia, which goes on to propose several insane solutions including "a browser extension." But the wildest idea is redistributive progressive taxation administered by Facebook: Facebook , for instance, already levies a 2.6% processing fee on personal fundraisers, so it is already set up to take a slice of donations. It could double that fee—with the fundraiser's consent—keeping half to cover processing costs and using the other 2.6% to top up donations to similar campaigns by lower-income fundraisers that aren't doing well. Facebook could use the data it has on users' education, employment and purchase history (as well as the education and employment history of friends) to make inferences about the socioeconomic status of anyone running an individual fundraising campaign, and then match donors to similar campaigns from people with less affluent friends. ... For example, if a donor's lawyer friend is running a fundraiser to cover the costs of three months off work while in chemo, Facebook could redirect 10% of that donation to helping someone who is missing shifts at Walmart or McDonald's for similar reasons. Look, as a human being who lives in the world, I do not love the idea of Mark Zuckerberg deciding who deserves to get medical care. But as a person who writes about finance and corporate governance and alternative methods of organizing economic activity, I think this is absolutely fascinating. Let's give it a try! Let's eliminate nation-states and have our system of taxation and redistribution and medical care controlled by one guy chosen because he came up with a good way to rank the hotness of his classmates during his sophomore year of college! Just the sheer contingency of putting society's most important, literally life-and-death decisions in the hands of whoever came up with the most distracting computer programs in the early 2000s. This is why I am rooting for Libra too; give Zuckerberg absolute unchecked control of the global financial system, sure, sure, sure, why not. Things happen Activists Bark Loudly With Smaller Bites. SoftBank Backers Rethink Role in Next Vision Fund on WeWork. Saudis Face Lengthy Oil Halt With Few Options to Fill Gap. Banks Warm to Mortgage Bonds That Burned Them in 2008. When Companies Improve Their Diversity, Stock Prices Get a Boost. Twitch Co-Founder's New Startup Rents Lawyers to Other Startups. Goldman's new technology chief comes from Amazon's cloud unit and plays in a Seattle grunge band. Crypto Firms Assess How to Comply With Anti-Money-Laundering Standards. "Now, where do the spoils go? In capitalism, they go to The Capital. In softwareism, it goes to The Software." Pigeon poops on lawmaker discussing pigeon poop problem. Elon Musk says 'pedo guy' tweet did not suggest British cave diver was pedophile. 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] Well, they bought the bonds back after at least one interest payment, so really they paid out at least 102 (98 for the repurchase, 3.9375 for the semiannual interest payment, and a bit more for accrued interest) for bonds they sold at 100, but you know what I mean. [2] The quarterly-taxes part is a small strand. The banks borrowing money to buy Treasuries is a biggish strand. |
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